Roth IRA or Traditional IRA – What’s the difference and which one is right for you?

Everyone knows that in this day and age we all need to be very conscious of saving for our retirement. This sounds easy enough, until you start investigating the options... 401Ks, 403Bs, IRAs, pension plans... it is confusing stuff. The following is a breakdown of the different IRA options out there. Hopefully a little clarification and explanation will encourage you to start saving for your future, and help you pick the IRA that is right for your situation.

A traditional IRA, or Individual Retirement Account, is held by a bank or brokerage, and contributions are tax-deductible. The contribution limits are $4,000 annually if you are under 50, and $5,000 annually if you are 50 or older. Since you essentially do not pay tax on the contributions when you make them, or the interest and dividends your money earns while invested, the money is instead taxed when you withdraw it from your account. Traditional IRAs are good for people who:

• Want the benefit of the tax savings immediately (which, for someone in the 25 % tax bracket making the maximum $4,000 contribution would be $1,000.)
• Will be in a lower tax bracket after they retire. If you feel you will be in the 15% tax bracket, for example, upon retirement, then you are saving yourself 10% on the taxes paid on your money (25% vs. 15%) or $400 for the example above.
• Need to have enough deductions in order to itemize their deductions and maximize their tax savings on other items.

With a Roth IRA, your contributions are not deductible. Taxes are paid on the monies contributed in the year in which they are contributed. However, upon withdrawal then, no taxes are owed. Contribution limits are the same as those for a Traditional IRA. Roth IRAs are good for people who:

• Are young, and in a lower tax bracket than they will likely be in later in their lives.
• Who cannot itemize their deductions anyway.
• Who feels safer knowing that the amount in their IRA account is the amount they will have saved for retirement (since it won't be taxed)
• Who wants the flexibility to withdraw their money at a younger age, including a ‘first-time homebuyer' withdrawal where you can apply up to $10,000 of your savings toward purchasing a home.

You are allowed to contribute to both kinds of IRA with a total limit of $4,000 if you are younger than 50 and $5000 if you are older. If it makes you feel more comfortable, there is certainly nothing wrong with having both types of IRA. Whatever your choice though, it is wisest to diversify your IRA investment portfolio so that your contributions are spread over lower and higher risk investments, allocated based on your situation. There is a lot to be considered when putting together a retirement investment portfolio. Your age, retirement goals, and current tax bracket are major factors. Though it may be confusing to the novice investor, a detailed matrix on the benefits of each IRA is available at http://en.wikipedia.org/wiki/401k_ira_matrix .