Workplace-sponsored retirement accounts aren't the only way to save. You can also stash money in Individual Retirement Accounts or IRAs.
IRAs boast rich tax benefits that give savings an extra edge to compound. The tax benefits depend on the IRA you select -- a traditional or Roth IRA.
Annual contributions to both accounts are the same
-- up to $4,000 per person or $5,000 for individuals who are 50
or above. In 2008, limits rise to $5,000 per person and $6,000 for
those over 50.
That said, some experts say the Roth IRA may be the better choice for most individuals because they offer potentially richer tax breaks and more flexibility in terms of funding and withdrawing funds.
"I do like the Roth over the
traditional IRA for a number of reasons,"
says Rick Meigs, president of 401khelpcenter.com.
"I like the concept of having your money
tax-free forever. In a Roth IRA, you don't have
to take mandatory withdrawals at 70½ and
you can keep contributing to it."
Here's the scoop: Roth IRA contributions are funded
with after-tax earnings. However, earnings grow tax-free and they
can be withdrawn tax-free, too, as long as the account is open for
five years, and you're age 59½ or older.
In fact, as Meigs notes, Roth earnings never have
to be withdrawn, and you can contribute to a Roth for as long as
you like. That's a great help for those who plan to work well past
traditional retirement years. On the other hand, withdraw earnings
before 59½ and you'll generally pay a 10 percent penalty.
The fine print: You may earn too much to fund a Roth, since they're only available to individuals whose modified adjusted gross income doesn't exceed a maximum of $114,000. For married couples filing a joint tax return, eligibility requirements top out at $166,000.
If your income disqualifies you from funding a Roth, consider the traditional IRA, which offers its own set of perks.