FINANCIAL “CENTS”

Talking Cash With Walt: The Traditional IRA vs. The Roth IRA

By Walter Woodgett

The IRA (Individual Retirement Account) has become the topic of much conversation this tax season. If you are looking for a simple way to save money for your retirement, the IRA is still a great vehicle.

The traditional IRA allows annual, tax-deductible contributions of up to $3,000 ($6,000 for married couples filing jointly) for anyone with earned income who is not an "active” participant in an employer-sponsored retirement plan. Your contributions grow tax-deferred, but they are subject to ordinary income tax when distributed. Distributions without penalty may begin at age 59, or upon death or disability, for a first-home purchase, higher-education expenses and for certain other exceptions.

The Roth IRA allows nondeductible, annual contributions of up to the lesser of 100% of earned income or $3,000 ($6,000 when married, filing jointly). Eligibility phases out for modified adjusted gross income (MAGI) from $150,000 to $160,000 joint filing, and $95,000 to $110,000 single filing. Eligibility is not restricted by age or active participation in an employer-sponsored retirement plan.

One question asked all the time is: How do you decide which IRA is the best option? Well, that really depends on your personal situation. Both have distinct advantages. Consider the following facts:

n Both the traditional and the Roth IRA offer penalty-free withdrawals for non-retirement expenses, such as a first-home purchase or higher-education costs.

n Traditional IRA (tax-deductible contributions) distributions are taxable, while all Roth IRA contributions (and their earnings), because they have already been taxed, can be withdrawn free from federal taxes.

n Contributions can continue to be made to a Roth IRA throughout your lifetime (provided the client continues to receive earned income). In a traditional IRA, contributions can no longer be made, regardless of earned income, beginning in the year the client turns 70½.

n You are never required to begin taking mandatory distributions from a Roth IRA. In a traditional IRA, mandatory distributions take effect after you turn 70½, regardless of earned income received.

The second question that is asked all the time is: Can I contribute to both a traditional IRA and Roth IRA simultaneously? Yes, up to a combined maximum dollar amount of $3,000 annually. Contributions to one IRA offset dollar-for-dollar the amount one can contribute to any other IRAs (excluding the Education IRA Account).

The third question that seems to confuse most is: What is the deadline to make an IRA contribution for any given tax year? IRA contributions may be made for a tax year at any time up to April 15 of the following year. NO extensions are permitted. The "tax year" means the period for which an individual must report income on his/her federal return.

Make sure you pick up the next Point of View issue, when I talk about the best way to save Big Money for your child’s college education. For questions, comments or suggestions, e-mail me at:

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