Traditional IRA Versus Roth IRA: Which One Is Right for You?

There are many types of savings instruments available to help you build a retirement nest egg. The traditional Individual Retirement Arrangement (IRA) and the Roth Individual Retirement Account (Roth IRA) are two of the most popular.

Traditional IRA

Contributions to a traditional IRA can be deductible from your income, which lowers the amount of federal income tax that you have to pay on that income. Federal income tax on your IRA will be deferred until you begin taking withdrawals, usually when you have retired and are in a lower tax bracket. Generally, you can qualify for a tax deduction if you are not a participant in an employer-sponsored retirement plan.

As of 2008, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (and eventually phased out) if your modified adjusted gross income (MAGI) is:

  • More than $85,000 but less than $105,000 for a married couple filing a joint return or a qualifying widow(er)
  • More than $53,000 but less than $63,000 for a single individual or head of household, or
  • Less than $10,000 for a married individual filing a separate return.

You must begin taking minimum annual withdrawals from your traditional IRA by April 1 of the year after the year you reach age 70½. Those withdrawals will be taxed as ordinary income. Consult with a qualified financial professional to find out how you can take advantage of the tax benefits of a Traditional IRA.

Roth IRA

Contributing to a Roth IRA may be a smart money move for you. Contributions to a Roth IRA grow tax free, and distributions may be tax free. You have until your tax return deadline (typically April 15) to set up and make contributions for the previous tax year. Annual contributions currently are limited to $5,000, annually.It’s not too late to invest for 2008. If you are just getting started with investing, make the Roth IRA your first choice (even before you open a regular, taxable account or contribute to a workplace retirement plan). The only exception is if your employer offers a match on your 401(k) contributions. That’s free money that you don’t want to pass up. You can invest in both a Roth IRA and a workplace retirement plan.

Use your tax refund to fund your Roth IRA. According to the IRS, last year the average refund check totaled more than $2,500. That’s a good starting amount for your Roth IRA investment. The MAGI ranges for 2008 are:

  • Single filers: Up to $101,000 (to qualify for a full contribution) and $101,000 – $116,000 (to be eligible for a partial contribution). No contributions are allowed for MAGI above $116,000.
  • Joint fliers: Up to $159,000 (to qualify for a full contribution) and $159,000–$169,000 (to be eligible for a partial contribution). No contributions are allowed for MAGI above $169,000.
  • Married filing separately: Up to $10,000 (to be eligible for a partial contribution). No contributions are allowed for MAGI above $10,000.

About the Author

Audrey McFarlin is a State Farm® agent. Contact her 24 hours, seven days a week, by phone or e-mail at 708-371-3555, www.audreymcfarlin.com or audrey@audreymcfarlin.com.

An individual can contribute up to $5,000 (or 100 percent of earned income, whichever is less) for tax year 2008. If you are age 50 or older, you are allowed to make an additional “catch-up” contribution of $1,000 for tax year 2008. If your modified adjusted gross income (MAGI) exceeds the limits stated above, the amount you can contribute will be limited.

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