Cents and Sensibility


Saturday, February 15, 2003

Deciding whether a Roth
or traditional IRA
is the right fit

Question: I can't decide if I should have a regular IRA or a Roth IRA. What should I be considering to determine which one is best?

Answer: These IRAs share some common characteristics. First, you can fund either one with virtually any type of investment you choose -- stocks, bonds, CDs, etc. And second, you can contribute up to $3,000 per year to either IRA, or $3,500 if you're 50 or over. (However, you can't contribute to a Roth IRA if your modified adjusted gross income exceeds $160,000, if you're married and file jointly, or $110,000, if you're single.)

Beyond these similarities, though, there are some important differences in the two IRAs.

Traditional IRA

Your traditional IRA contributions may be tax deductible, depending on your annual income and whether you're covered under an employer-sponsored retirement plan. And your earnings grow tax-deferred until you start taking withdrawals.

Roth IRA

You fund a Roth IRA with after-tax dollars, so you always have tax- and penalty-free access to your contributions. And your earnings grow totally tax-free, provided you don't start taking withdrawals until you're 59 1/2 and you've had your account for at least five years. Also, you can typically make tax-free withdrawals for first-time homebuyer expenses. (If you withdraw money from a traditional or Roth IRA before you're 59 1/2, you may have to pay a 10 percent penalty.)

So, which IRA is right for you? As is often the case in the investment world, there are no easy answers. If you're not eligible to deduct your contributions to a traditional IRA and you are eligible to contribute to a Roth IRA, then you may want to choose the Roth IRA.

But what if you're eligible to contribute to a Roth and you could still deduct your contributions to a traditional IRA? On one hand, the traditional IRA offers a combination of tax deductibility and tax-deferred growth. On the other, a Roth is one of the few investments offering tax-free earnings.

Obviously, it's a tough choice. And that's why you may want to consider some other criteria. For example, if you have a traditional IRA, you must start taking minimum distributions by the time you're 70 1/2. With a Roth, you never have to take them -- you can leave the entire value of your IRA to your beneficiaries, and they won't have to pay taxes on withdrawals. Consequently, your projected need for retirement income and your desire to leave money to your family are two factors you'll want to consider when choosing between a Roth and a traditional IRA.

Unfortunately, you can't have it both ways -- that is, you can't contribute the maximum amount to both types of IRAs. Whatever amount you contribute to one will reduce what you can contribute to another.

A qualified financial professional or your tax adviser may be able to help you determine which type of IRA is right for you. But, even with this assistance, make sure you understand all the issues involved. Remember, this money is for your retirement -- so you'll want to make the right moves.

Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at:

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