Decision time for IRAs

  • Star Tribune
  • Sunday, March 27, 2011 12:01am
  • Business

Traditional or Roth?

April 18, tax day, is also the last day you can make contributions to traditional or Roth Individual Retirement Accounts (IRA) for the year 2010.

The two savings vehicles, which you can open at a bank or an investment firm, have different advantages.

Traditional IRA: Contributions into a traditional IRA can be deductible, reducing your tax bill today, although it depends on how much money you earn and whether you are covered by a workplace retirement plan. However, when you take the money out at retirement, it’s taxed.

Roth IRA: Roth IRAs are funded with after-tax dollars, but the withdrawals in retirement are tax free. This makes the Roth attractive to investors convinced that taxes are only going north.

Roths also have a lot of flexibility. You can withdraw the money you invest at any time without penalty, making it a nifty savings vehicle for people who are nervous about putting their money away in a retirement plan that’s harder to access.

Many advisers suggest workers invest in their 401(k) plans at work up to the company match, if offered, and then max out the Roth IRA next.

The maximum contribution for both types of IRAs is $5,000 plus a $1,000 catch up contribution for those 50 and over.

For details, check out IRS Publication 590.

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