Roth Ira

When you compare Roth IRA and traditional IRA with respect to how they are treated, the treatment is actually the same. The only exception is when the Internal Revenue Code provides otherwise. For instance, you get the same maximum contribution allowed for Roth IRA and traditional IRA ($4,000 in 2006).

If you contribute to a Roth IRA, the amount that you will have to contribute to an existing traditional IRA will be reduced, in the same manner that when you make your contributions to the traditional IRA, it will result in reduction of the amount that you can contribute to a Roth IRA.

If you compare Roth IRA and traditional IRA with respect to their contributions, you will find that the contributions you will make to a Roth IRA are not tax deductible. On the other hand, the contributions to a traditional IRA are generally tax deductible. There is, however, an exception given to the high income taxpayers.

With Roth IRA, you are not allowed to contribute if your modified adjusted gross income exceeds certain limit. Traditional IRA does not have this kind of limitation; hence, all taxpayers may contribute to a traditional IRA. Another thing you will discover when you compare Roth IRA and traditional IRA is that Roth IRA allows individuals to contribute even after they reach the age of 70 ½; you do not get this attribute with the traditional IRA.

Both in Roth IRA and traditional IRA, your earnings are tax-deferred until you withdraw them. The difference between the two appears when you make withdrawals. With traditional IRA, all distributions are taxable (since income taxes were only deferred) and all your contributions to it are taxed according to your tax rate at the time of distribution.

When you compare Roth IRA with traditional IRA using that feature, for as long as your Roth IRA account has been established for five years, all your contributions and their respective earnings may be distributed tax-free after you reach the age of 59 ½. This makes Roth IRA a more attractive investment vehicle than the traditional IRA.

After you compare Roth IRA with traditional IRA, you may be facing a dilemma on whether to choose Roth IRA or traditional IRA. If you are one of those people who find Roth IRA as a better option even if all of the traditional contribution is deductible, then you can make your contribution to the Roth IRA.

However, if you find that traditional IRA provides a significant advantage in your particular circumstance, then you should choose traditional IRA. For instance, you currently belong to the 28% tax bracket but expect to be in 15% bracket when the money comes out of the traditional IRA. Another thing to consider when choosing traditional IRA is the part of your contribution to traditional IRA is too small to matter.