Traditional vs Roth IRA

Although December 31st has passed, you still have until April 17, 2012 to make a contribution to an IRA for the 2011 tax year. But should you contribute to a Traditional IRA or a Roth IRA? Here are some things to consider before deciding.

The basic difference between them is that you are not able to deduct the contributions made to a Roth while you can deduct contributions made to a traditional IRA. So here are the pros and cons of each.

With a traditional IRA you must pay income tax when you withdraw your funds and you are not allowed to make contributions after you reach age 70.5. Instead, you will be required to make a minimum withdrawal starting at age 70.5 based upon the amount in the fund and your life expectancy.

In contrast, withdrawals from a Roth are tax free as long as the account has been open for at least five years and you are at least 59.5 years old. There is no requirement that you make withdrawals at age 70.5 and your account can be passed to your heirs tax free. You can also contribute to it even if you are over 70.5 and you can make contributions to it even if you have another retirement plan.

One problem with a Roth is that you cannot make contributions if your income is above $169,000 for a married couple filing jointly, or is above $107,000 if you are single.

So which is best? I guess a lot depends on when you intend to retire. If you are going to retire at or before age 65, it might make sense to contribute to a traditional IRA and take the deduction now because you are likely to be in a lower tax bracket then.

However, if you intend to work beyond the “typical” retirement age, you might be better off making a contribution to a Roth IRA since you will not be required to make the minimum withdrawals at age 70.5 and can continue to grow your investment tax free.

Probably the best advice is to talk to a financial professional and take a careful look at your goals, options and opportunities. And don’t forget, if you want to make a contribution for tax year 2011, you must do it by April 17.

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