IRA—those three letters can play a key role in your retirement savings strategy. If you haven’t
already included an individual retirement account (IRA) in your retirement savings plan, you’re
missing out on a great way to save for your future and reduce the amount of taxes you pay
as well.

Before you run out to open an IRA though, decide whether a traditional or Roth is right for you.

Comparing Traditional and Roth IRAs

Traditional IRAs Permit contributions up to age 70-1/2 if you have earned income Provide a current tax deduction for eligible participants Allow investment earnings to grow tax-deferred (distributions will be taxed at your regular income tax rate at the time of withdrawal) Require distributions to begin by age 70-1/2	Roth IRAs Permit contributions as long as you have earned income Allow investment earnings to grow tax-free (there is no current tax deduction on contributions, but distributions in retirement are not taxed) Do not require distributions to begin by any particular age (in fact, a Roth IRA can be passed along untouched to your heirs)

Although both IRA options offer tax benefits, the differences between the two can’t be stressed
enough. The Traditional IRA allows federal tax-deductible contributions and tax-deferred
withdrawals while the Roth offers federal tax-free withdrawals (but no current deduction).
Either way, you win with an IRA!

Contribution limits and the cost of early withdrawal:
In 2008, the maximum IRA contribution for an individual is $5,000 ($6,000 if you are age 50 or
older) or your taxable compensation for the year—whichever is less. Bear in mind that the tax
benefits are only granted to eligible savers, and there are penalties for those who make
early withdrawals.

If you take money out of either IRA before you reach age 59-1/2 (or if, in the case of the Roth,
the money has not been in the account for at least five years beginning with the first year
you made a contribution), you’ll have to pay taxes at your current income tax rate, plus you’ll
be charged a 10 percent early withdrawal penalty. You might be exempt from the penalty if
you become disabled, are a first-time homebuyer, incur certain non-reimbursed medical
expenses, face qualified higher-education expenses, or take substantially equal periodic
payments until age 59-1/2 or for a minimum of five years, whichever comes last.

Choosing between the Traditional and the Roth
Since the Roth’s inception in the late ’90s, retirement savers have wrangled with the question
of which IRA is best. Choosing between a Traditional IRA and a Roth IRA means deciding
whether you want to take advantage of the up-front tax break (if you are eligible) or enjoy
tax-free withdrawals later. Either is good, but which is better?

For those who qualify for both a Traditional IRA and a Roth IRA, the choice can be complicated.
If you’re facing a tough decision, consider:

How soon you’ll need the funds: You generally have to be 59-1/2 to withdraw funds from either
a traditional or Roth IRA without a penalty. In most cases, you must have a Roth IRA for at least
five years before you can tap it without being taxed on the earnings, although you can withdraw
your contribution without a penalty at any time. If you’ll need the money sooner than five years
from the date you open the account, the Traditional IRA may be best. If you’ve got a time frame
that’s longer than five years, this won’t be a factor.

How much you can deduct: If your contribution to a Traditional IRA is not deductible and you
qualify for a Roth IRA, you may want to look at the Roth IRA.

What you expect to earn in retirement: If you anticipate remaining in a high (or higher) tax
bracket, the tax-free distribution of a Roth IRA may be more appealing. For more information
about IRAs, refer to IRS Publication 590 or talk to a financial or tax professional.

Unbiased financial information provided by Financial Finesse.