There are three commonly used IRAs. Choosing the right one largely depends on your retirement goals and of course also upon your eligibility. Don’t worry though, once you understand what sets them apart you’ll easily be able to choose the right IRA.
As I said in my previous post there are three common IRA types:
1) Traditional IRA
2) Roth IRA
3) Rollover IRA
So let’s start with the Traditional IRA.
Traditional IRA:
A Traditional IRA is an account that give you the opportunity to grow your earnings tax-deferred until you withdraw when you retire. It also offers the potential for tax-deductible contributions.
Benefits:
Any earnings grow tax-deferred until withdrawn after 59 1/2 at which point they are taxed at your current rate. Contributions also may be tax-deductible. You need to consult with a specialist on this matter.
Who is eligible?:
Anyone under the age of 70 1/2 who has earned income equal to or greater than their IRA contribution amount.
* If you contribute to an employer-sponsored plan like a 401(k) or 403(b), you are still eligible to contribute to a Tradiotional IRA
* If you have no earned income but your spouse earns enough income to cover your contribution as well as their own you can contribute to a Traditional IRA
How much can I contribute?
If you are under the age of 50 you can contribute:
For 2008: $5000
*If you are 50 years of age you can make an additional $1000 “catchup” contribution each year
Are my contributions tax-deductible?
Your contributions to an Traditional IRA may be fully tax-deductible if any of the following conditions apply:
* Neither you nor your spouse participates in an employer-sponsored retirement plan.
* You participate in an employer-sponsored retirement plan and your modified adjusted gross income is $53,000 as a single taxpayer or $85,000 as married taxpayers filing jointly.
* You do not participate in an employer-sponsored retirement plan, but your spouse does, and your joint modified gross income is no more than $159,000
What can I invest in?
You may invest in products such as mutual funds, stocks, bonds, ETFs, as well as bank offered investment vehicles such as CDs and money market accounts.
Roth IRA:
A Roth IRA is an account that provides the opportunity for your earnings to grow tax-free. However, Roth IRAs offer greater tax savings and withdrawal flexibility than Traditional IRAs.
Benefits:
* Any earnings are tax-free if withdrawn after the age of 59 1/2 and the account has been open five years or more
* Your contributions (not earnings) can be withdrawn tax and penalty-free at any time
* No required minimum distribution (RMD) at age 70 1/2
Who is eligible?:
Anyone as long as your modified Adjusted Gross Income (AGI) does not exceed:
2008
Single Tax Filers – $116,000
Joint Tax Filers – $169,000
* Account owner must have earned income equal to or greater than their IRA contribution amount
* If you contribute to an employer-sponsored plan like a 401(k) or 403(b), you are still eligible to open a Roth IRA as long as you meet the eligibility requirement above.
* If you have no earned income but your spouse earns enough income to cover your contribution as well as their own and their income (AGI) does not exceed the limits above you can contribute to a Roth IRA.
How much can I contribute?
If you are under age 50 you can contribute:
2008 – $5000
If you are age 50 or above you can make an additional $1000 “catchup” contribution each year.
What can I invest in?
As with a Traditional IRA a Roth IRA allows you to invest in a wide variety of income vehicles such as mutual funds, stocks, bonds, ETFs, and of course bank products like CDs and money market accounts.
Rollover IRA:
A Rollover IRA is an account designed for receiving transfers from a previous employer-sponsored retirement plan, such as a 401(k) or 403(b). By “rolling over” these assets directly you maintain the tax-deffered status of the account, simplify the management of your retirement investments, and potentially increase your investment choices.
Whois is it for?
Anyone with an employer-sponsored plan with a former employer
What are the benefits?
* Maintains the tax-deferred status of your plan(s)
* Offers more investment choices
* Provides a more consolidated view that makes it easier to track how your retirement savings and investments are performing
What can I invest in?
As with other IRAs you may invest in mutual funds, bonds, stocks, ETFs, as well as bank products like CDs and money market accounts.