retirement

How do I: Choose traditional or Roth IRA?

By Rose Raymond • Bankrate.com

Topic: RETIREMENT

Who is affected: CONSUMERS AT ANY LIFE STAGE

DEGREE OF DIFFICULTY: EASY

What you'll need: YOUR INCOME AND TAX BRACKET INFORMATION

What you need to know

The benefits of individual retirement accounts, or IRAs, are not to be underestimated. Investors can choose between a Roth IRA and a traditional IRA.

But what is the difference between the two?

Roth IRAs are funded with your after-tax earnings. They then grow tax-free and funds aren't taxed when they're removed.

Traditional IRAs are funded with pretax earnings, meaning you don't pay the taxes up front. The money then grows tax-free, but is taxed later when you withdraw it in retirement.

Retirement experts debate which savings vehicle is best. Your present income and expected income in retirement play a significant role in determining which type of IRA you should choose.

Bankrate has several articles that can help you make the right choice. You may also benefit from discussing your options with a Certified Financial Planner.

At a glance: Traditional IRA vs. Roth IRA

	Traditional IRA	Roth IRA
Tax deduction for funding the account?	Yes, if income eligibility requirements met	No
Required minimum distributions?	Yes, by age 70½	No
Earnings	Taxed at withdrawal	Never Taxed

Step-by-step

Use this calculator to determine whether a Roth IRA or traditional IRA is better for you.

Percent to contribute

Annual salary

Current age

If you already have a traditional IRA, you can roll over your savings into a Roth IRA. You'll pay taxes when you convert, but your savings will be untaxed at removal, and you can avoid the traditional IRA's minimum distribution age of 70½.

Conversion usually benefits young workers in a lower tax bracket and high-income earners unable to directly contribute to a Roth IRA.

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Posted: Dec. 1, 2008

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