With three options to choose from -- Roth, deductible or nondeductible -- figuring out which IRA is best for you can be confusing. But everybody who plans to retire ought to have at least one of them. Outside of your corporate retirement plan, an IRA is the best way for you to accumulate tax-advantaged retirement savings.
Our favorite IRA is the Roth. Unlike traditional IRAs (both tax-deductible and nondeductible), withdrawals from Roth IRAs after age 59 1/2 are generally not taxed. You pay your taxes on the front end by contributing after-tax dollars. So Roth IRAs enable savers who remain in the same income tax bracket (or higher) at retirement to accumulate more money than even tax-deductible IRAs do.
Besides fostering tax-free growth, the Roth IRA has flexible withdrawal rules. You can take out contributions (but not gains) for any reason without penalty or taxes. And after you reach age 59 1/2 and have had the account open for five years, you can withdraw your gains tax- and penalty-free as well. Ditto, if you become disabled.
Trouble is, everyone isn't eligible to open a Roth IRA. Who qualifies for 2011? Joint filers with modified adjusted gross income, or MAGI, below $179,000, and singles with MAGI below $122,000. (Though eligible contributions start to phase out at $169,000 for joint filers and $107,000 for singles.)
Like traditional IRAs, the Roth IRA allows 2011 contributions of $5,000 per person ($6,000 if you are age 50 or older at the end of the year). But taxpayers can also roll over assets from their traditional IRA accounts into a Roth. This is called a Roth IRA conversion. You'll pay income tax on the conversion, but not on future qualified withdrawals from the Roth account.
And remember, if your employer matches your 401(k) contributions, you should contribute up to the matching limit before establishing an IRA.
So, unless you expect to be in a lower tax bracket during retirement than you are now, a Roth IRA is a better deal than even a tax-deductible IRA. And it's always a better deal than a nondeductible one.
The IRA Buffet
| Tax Deductible IRA | |
| Who's Eligible |
In tax-year 2011, eligibility phases out for individuals with MAGI between $56,000 and $66,000 and for married couples with MAGI between $90,000 and $110,000. No income cap for singles not covered by an employer-sponsored retirement plan or for married couples when neither participates in such a plan. If only one spouse participates in an employer-sponsored plan, deductible IRA eligibility for 2011 phases out between MAGI of $169,000 and $179,000 for uncovered spouse, between $90,000 and $110,000 for covered spouse. |
| Annual Contribution |
$5,000 tax-deductible ($6,000 if you are age 50 or older at year-end). |
| Withdrawals |
Withdrawals taxed as income. Penalty-free withdrawals permitted before age 59 1/2 for first-time home purchase up to $10,000, higher education expenses or in event of disability or death. |
| Roth IRA | |
| Who's Eligible |
For 2011, eligibility phases out between MAGI of $107,000 and $122,000 for singles, and $169,000 and $179,000 for married couples. |
| Annual Contribution |
$5,000 not tax-deductible ($6,000 if you are age 50 or older at year-end). |
| Withdrawals |
Tax-free and penalty-free withdrawals of earnings plus contributions after five years if you are 59 1/2 or in the following circumstances: death, disability or for first-time home purchase up to $10,000. Penalty-free, but not tax-free withdrawals permitted before age 59 1/2 for higher education expenses. |
| Nondeductible IRA | |
| Who's Eligible |
Everyone who has earned income. |
| Annual Contribution |
For 2011, $5,000 ($6,000 if you are age 50 or older at year-end). |
| Withdrawals |
Withdrawals of earnings taxed as income. Penalty-free withdrawals permitted before age 59 1/2 for first-time home purchase up to $10,000, higher education expenses or in event of disability or death. |
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