IRA’s here it is we have two choices ROTH or Traditional
First the basics, an IRA is an Individual Retirement Account, the government loves them because they fear the future, and by getting the general public to start IRA’s they know that they are less liable and fewer people will have no money at retirement. First some of the quality’s that they both share….
- Tax deferred growth (you pay no tax while your money grows within the account)
- Freedom of investment (you can invest in what you want from a CD to a mutual fund)
- Eligibility you must have earned income, if married and filling together only one must
Have earned income.
- You are allowed to open an IRA even if you have a 401k or other retirement plan
- Contribution must be in the account by the tax deadline for any given year. And the most you can contribute is $4000 (if you are over 50 then you are given what is called a catch up contribution of $1000 giving you a total of $5000 per a year) the government is always increasing this number so in the future we will most likely be able to contribute more in 2008 it is supposed to go up to $5000 plus the catch up if you are over 50yrs.
- Withdrawals 591/2 is when you can start to take withdrawals from your IRA’s with out penalty the ROTH has a special provision that I will talk about later…
Now what is the difference there are a lot of differences but the main one is that in the ROTH all money comes out tax free this is why not everyone can contribute to a ROTH,
If you make more then 99K filling single or 156k filling joint you start to get phased out and the amount you can contribute goes down. The other main point to hit on about the ROTH is that at any point in time you can take out what you put in with out penalty example over time you put 10k in and it grows to 15k, you can take out the 10 but the 5 in growth must stay until you are 591/2.
Everyone can contribute to a traditional but not all contributions are tax deductible. Whether or not you will get a tax deduction on your contribution is a tax question that I can not answer, but anyone can contribute and take advantage of the tax deferred growth. When you start to take money out (591/2) you have to pay taxes on the growth and contribution that you received a tax deduction on. Also with the Trad. You can roll over old 401k’s, 403b’s……into your Trad IRA and maintain the tax deferred growth while now having freedom of investment choices.
I hope this helps, if there are any question feel free to e mail me at firstname.lastname@example.org