Two Basic Types Of IRAs

Although there are a variety of IRAs available, here are two of the most common IRAs.

• Traditional IRA • ROTH IRA


1. Traditional IRA

This type of IRA can be set up by any individual who has earned income. Earned income is defined as W-2 type income as reported on your tax forms. Typically, wages, salaries, tips commissions and bonuses. Most of these accounts will have a minimum amount to fund it and have a yearly maximum amount that can be put in each year. The minimum varies from different institutions so check out different ones to find one that you can afford. The maximum amount to be able to contribute currently is $5,000 yearly if you are under 50 years of age or $6,000 over the age of 50. Also you cannot contribute more than you earn, meaning if you only earned $1,000 than that is the maximum you can put in. The amount you put in also can be deducted from your taxable wages thus decreasing the amount of tax you pay in a given year. However when you start the withdrawal process you then pay taxes as ordinary income at that current rate. To avoid any penalties you cannot start to withdraw money until you have reach the age of 59 ½ but you can wait all the way up into age 70 ½ before you have to start making mandatory minimum withdrawals.

2. ROTH IRA

The Roth IRA came into being in 1997 and was created to be a bit more flexible than a Traditional IRA. You still need to have earned income to open a ROTH IRA, and your contribution cannot be more than you have earned however it is not tax deductible. You pay your regular income tax on your income than pay into your ROTH account. Upon withdrawing from your ROTH you do so without having to pay any tax on it. There are also no age restrictions on when you need to start withdrawals from this type of account. As long as you still have earned income you can contribute way past the 70 ½ year age bracket unlike which the traditional IRA requires that you must start taking minimum distributions but you can take it out when you wish.

Your income level and your tax bracket can be a determining factor in which type if IRA you choose. If you are in a very high tax bracket and think you will be in a lower tax bracket when you retire, then you might need the tax deduction now that a Traditional IRA allows.

Or, if you think you might still be in a high tax bracket when you retire, you might want to pay the taxes now on a Roth IRA when you are still earning good money and can afford to do so and then pay no taxes from the IRA when you decide to take payments from it.

All and all you should probably talk to a financial or tax advisor to help you choose which retirement route will best be suited for you.


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Casey Trillbar is the editor of YourRothIRAGuide.com, which is a website
aimed at supplying articles, information and resources to people
considering the use of a Roth IRA Agreement for their retirement.

http://www.YourRothIRAGuide.com