Tax Debt Help - Traditional IRA vs. Roth IRA

What is an IRA?An IRA or Individual Retirement Account is a plan that allows you to contribute a portion of your after tax earned income each year. If you are 50 or older, you can contribute even more to your IRA. Almost anyone can contribute to an IRA if they have earned income for the year at least equal to the amount of the contribution. There is a maximum contribution limit per year and those who are 50 years of age or older can make additional "catch up" contributions.

Annual Contribution Limits for IRAs per Individual

Tax years 2006 - 2007	$4000 for those under 50 and $5000 for those 50 and over
Tax year 2008	$5000 for those under 50 and $6000 for those 50 and over

Married couples can each contribute to an IRA even if only one had an income for the year if the working spouse earns enough to cover the IRA contributions for both. There are two common types of IRAs, the traditional IRA and the Roth IRA. All accumulated interest, dividends, and capital gains on a traditional IRA are tax-deferred until the money is withdrawn. All accumulated interest, dividends, and capital gains on a Roth IRA are tax-free if you meet certain requirements.

Difference Between a Traditional and Roth IRA
A Traditional IRA is a tax-deferred individual savings plan. Contributions are made up to a specified limit with the contribution tax deductible. Money invested and earned in a traditional IRA are subject to income taxes at the time of withdrawal.

Withdrawals can be made without penalty once a person reaches the age of 59 1/2 and a person must begin withdrawing from the account at the age of 70 1/2.A Roth IRA is also primarily an individual savings plan.

Contributions can be made up to a specified limit on a non-deductible basis. This means, a contribution can be made to a Roth IRA but no deduction can be taken from income tax for the amount of the contribution.

Withdrawals are tax free within certain limitations. Withdrawals can be made without penalty once a person reaches the age of 59 1/2 provided the funds have been in the account for 5 years. Unlike a traditional IRA, contribution can continue to be made to a Roth IRA even after the person has reached the age of 70 1/2.

S. Raines, Sr. Financial Advisor/Tax Preparer