Anyone who earns income through employment or has a spouse with earned income may be eligible to contribute to an Individual Retirement Account (IRA).  The common question is which IRA, Traditional or Roth IRA, is best for you? 

A Traditional IRA may allow you a tax deduction for your contributions if your household income falls within certain limits.  If you are covered by a retirement plan at work, your deductibility could also be affected.  Your earnings grow tax-deferred until you withdraw, and at that time your withdrawal will be taxed.  Withdrawals prior to age 59 ½ are generally subject to a 10% penalty unless you qualify for an exception.  You are required to start taking withdrawals annually no later than the April after you turn age 70 ½, and you can no longer make contributions.

Your ability to contribute to a Roth IRA is also subject to household income limits.  Contributions are made with after-tax dollars and they are not tax-deductible.  Your earnings grow tax-free and, as long as certain conditions are met, withdrawals are also tax-free.  You are not required to take distributions during your lifetime and you can continue to contribute as long as you have earned income.  Generally, once the Roth IRA has been open for five years, a degree of flexibility is available if you need to withdraw. 

If current tax deductions are important to your situation, the Traditional IRA may be best.  If future tax-free withdrawals and some flexibility are priorities, the Roth IRA could be your choice.  Some people like to do a combination of both.  You can do this as long as your contributions remain within the current limits of $5500 if you’re younger than 50 and $6500 if you’re 50 or older.  Either type gives you the opportunity to save for retirement!

Lisa Dugan

Posted Wednesday, February 25, 2015 at 2:30 PM