Choosing an IRA - Traditional, Roth or Both?

GRAND RAPIDS, Mich. - June 17, 2014 - PRLog -- A beagle and a Great Dane are both dogs, but very different dogs. A convertible and a station wagon are both cars, but very different cars. And a traditional and a Roth are both Individual Retirement Accounts (IRAs), but also very different.

While both traditional and Roth IRAs are designed to help you save for retirement, they work differently. Since the type you choose can have a big impact on how you reach your goals, it's important to understand the differences between them.

Tax Implications
The big difference between the two types of IRAs has to do with when you pay taxes on the money – either now or when you withdraw it in retirement. There are advantages to both.

With a traditional IRA, your contributions may be tax-deductible and can grow tax-deferred. This tax-deferral allows your assets to potentially grow faster because earnings on your investment inside the traditional IRA are not taxed until you take distributions*.

When you retire and begin taking your money out, your withdrawals are taxed at whatever your ordinary tax rate will be in retirement. Many people anticipate their tax rate in retirement will be lower than their tax rate today, so they find this a benefit.

When you contribute to a Roth IRA, on the other hand, you're using after-tax dollars – money on which you've already paid taxes – so you won't be able to take a current-year tax deduction. However, the earnings on your investment inside a Roth IRA grow tax-free. Since you've already paid taxes on your contributions, your withdrawals in retirement are not subject to taxes, and all qualifying distributions are tax-free**.

This can make sense for investors who can afford to forego the deduction today for the prospect of tax-free income in retirement. This future tax-free income in retirement is one reason why a Roth IRA can be most beneficial to younger investors and those who may be in a higher income bracket in retirement.
Generally, anyone under the age of 70-1/2 who has earned income can contribute to a traditional IRA, with no age restrictions for contributing to a Roth IRA. But depending on your income level, you may not be able to contribute fully or at all to a Roth IRA.

The contribution limit for 2013 and 2014 is $5,500 or $6,500 if you are 50 years of age or older.

While some people choose a traditional IRA, others find benefit in a Roth IRA. There's also a third option – diversifying across both types of IRAs. The same way that diversifying your portfolio helps you weather the ups and downs of the stock market, this can help you counter the ever-changing tax environment and achieve flexibility in retirement.

The bottom line is this: when deciding on an IRA, there's a lot to consider for both now and the future. An Edward Jones financial advisor can help determine not only an IRA strategy to fit your personal situation, but a total retirement strategy.

* Early withdrawals are subject to ordinary income tax and a 10% penalty if you take a distribution before reaching age 59½.

** Earnings distributions from a Roth IRA may be subject to taxes and a 10% penalty if the account is less than five years old and the owner is under age 59½.