Questions and advice need about IRA's

[FrugalMomof3]

DH and I are interested in starting an IRA but not sure which one to go with, the ROTH IRA sounds more like something better for us but I see some ladies here talking about a Traditional IRA.

How does one choose? We dont plan on starting this till 7/07 but want to get some advice/opinions first.

Thanks in advance!

[PAVallygrl]

A traditional IRA, or Individual Retirement Account, is a tax-deferred personal retirement fund. You can contribute up to $3,000 a year if you are under 50 or $3,500 a year if you are age 50 or older. Depending on how much you earn and your marital status, the money you invest may be tax-deductible (deductible IRA) or not (non-deductible IRA). The best part about an IRA is that your investments grow tax-free until you take the money out at retirement.
A Roth IRA is a tax-deferred retirement account that turns the traditional IRA formula on its head: although retirement contributions are taxed up front, withdrawals can be made completely tax-free once you reach age 59 1/2 and have had a Roth IRA for five years. For some people, paying taxes now to enjoy tax-free income later may actually make more financial sense in the long term. For one thing, the Roth IRA allows investors to effectively shelter more money for retirement. Although the annual contribution limit is the same for both traditional and Roth IRAs, because your Roth contribution is made with after-tax income, the full $3,000 (or $3,500 if you're age 50 or older) can compound substantially over the years — without incurring any future tax liability. The amount you can contribute to a Roth IRA may be reduced or eliminated depending on your filing status and your adjusted gross income level.

Tracy please note however that in PA your not taxed (state that is) when you go to take out your IRA - at least that is what my CPA told me......he said he's even surprised that Harrisburg didn't pick up on that one yet.

Me personally? I went with the Traditional IRA - Not taxed going in and not state taxed coming out!

[Telephus44]

Here's just a few differences that I considered. All of these only apply to federal taxes - I haven't done the research on state taxes (though I probably should have).

Since a traditional IRA gives you a tax break now, and a ROTH IRA gives you a tax break in the future, you need to bet on whether you're in a lower tax bracket now or in your retirement.

A traditional IRA you can contribute to no matter how much money you make - once you hit the income limits you can't take the tax deduction if you're covered under an employer plan (like a 401K), but you can always make a contribution. With a ROTH IRA when you hit the income limit, you can't make any contributions. So you want to take into account where your income general falls.

Personally, I went with a ROTH IRA because withdrawals from a traditional IRA are taxed (including capital gains, although they are taxed as ordinary income) whereas the withdrawls from a ROTH are tax-free (so all of my capital gains are tax free!).

Just something to think about. If my income were higher, I'd probably have gone with a traditional IRA.

If you're bored, or like reading official IRS publications:

http://www.irs.gov/publications/p590/index.html