Traditional Ira vs. Roth Ira

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  • Topic: Roth IRA, Individual Retirement Account, Pension
  • Pages : 3 (953 words )
  • Download(s) : 215
  • Published : November 27, 2006
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Regular IRA vs. Roth IRA

An IRA is an individual retirement account, or savings plan, that offers tax advantages to an individual that sets aside money for retirement. There are Regular IRAs and there are Roth IRAs. For both plans, the only way you can contribute is with money earned from working. If you are a student with no taxable compensation, then you cannot open an IRA. When you invest in a Regular IRA, your contributions are tax-deductible. However, when you invest in a Roth IRA, your contributions are made with after-tax dollars and they grow tax free. Each of these options are great ways to begin saving money for retirement, yet each of them has their own advantages and disadvantages. The total amount of money that can be contributed to either a Regular IRA or Roth IRA in one year is limited. For 2006 you can contribute up to $4,000 per year or your taxable compensation for the year, whichever is less, if you are under 49 years of age. If you are 50 years of age or older you can contribute up to $5,000 per year or your taxable compensation for the year, whichever is less. These are fairly general limitations on contributions, and of course there are more strict eligibility requirements for contributions based on income, filing status, and whether or not you have any other retirement plans.

The main advantage of Regular IRAs is that your contributions are tax-deductible. This would be most beneficial if you are currently in a higher tax bracket than you would expect to be in when you retire. This is because all withdrawals from a Regular IRA are included in gross income and are taxed as such. Also, there is a 10% early distribution penalty if you withdrawal funds from a Regular IRA before the age of 59 and 1/2. Of course there are restrictions on your deductions according to factors such as filing status, income, and if you are covered by a retirement plan at work. If you are not covered by a retirement plan at work, then you can take...
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