Yahoo! Which IRA is Right for You?

Topic - Which IRA is Right for You?

YOU'VE PROBABLY HEARD all the hullabaloo over the last year or so about Roth IRAs. And the truth is, if you qualify for one (see table below), a Roth is probably your best option.

We would reiterate here that if your employer offers a 401(k) plan with a match, you should always max it out before considering any type of IRA. But after that, a Roth will typically give you the best bang for the buck.

Why is a Roth better? Unlike traditional IRAs (both tax-deductible and nondeductible), withdrawals from Roth IRAs after age 59 1/2 are not generally 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 at retirement to accumulate more money than even tax-deductible IRAs do.

They're also more flexible. With a Roth, you can withdraw contributions (but not gains) for anything you want, penalty- and tax-free. College, home down payments, expenses related to a disability -- you name it. The one big restriction is that you'll generally have to wait five years to withdraw conversion contributions from a traditional IRA.

The only problem with a Roth is that you might not qualify. Who does? Joint filers with adjusted gross income (before IRA contributions) below $160,000, and individuals with adjusted gross income below $110,000. (Eligible contributions start to phase out at $150,000 for joint filers and $95,000 for individuals.)

If you do qualify for a Roth, you can make annual contributions of $2,000 per person. And if your adjusted gross income is under $100,000, you can also convert money from other IRA accounts into a Roth. You'll have to pay taxes upfront, but over the long term, you'll probably end up earning a lot more.

The IRA Buffet

TAX-DEDUCTIBLE IRA

Who's Eligible Individuals who do not participate in an employee-sponsored plan or (in 1998) those with modified adjusted income of less than $30,000 and couples with modified adjusted income of less than $50,000* (for 1999, $31,000 and $51,000, respectively).

Annual Contribution $2,000 tax-deductible

Withdrawals Withdrawals taxed as income. Penalty-free withdrawals permitted before age 59 1/2 for first-time home expenses up to $10,000, educational expenses, or in event of disability.

Account Value After 10 Years $29,573

ROTH IRA

Who's Eligible Eligibility phases out between $95,000 and $110,000 in modified adjusted gross income for individuals, and $150,000 and $160,000 for couples.

Annual Contribution $2,000 not tax-deductible

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 expenses up to $10,000. Penalty-free, but not tax-free, withdrawals permitted before age 59 1/2 for educational expenses. Tax- and penalty-free withdrawals of any conversion contributions (not gains) after five years.

Account Value After 10 Years $31,291

NONDEDUCTIBLE IRA

Who's Eligible Everyone

Annual Contribution $2,000 not tax-deductible

Withdrawals Withdrawals taxed as income. Penalty-free withdrawals permitted before age 59 1/2 for first-time home expenses up to $10,000, educational expenses, or in event of disability.

Account Value After 10 Years $28,130

Source: Arthur Andersen, Merrill Lynch Private Client Marketing.
*These income caps will gradually increase to $50,000 for singles by 2005 and $80,000 for couples by 2007.
$2,000 annual contributions at 8% growth rate. Assumes that contributions are made on the first day of each year and that withdrawals are taken at the end of the contribution period. Assumes a constant 28% tax rate throughout the projection period and assigns a constant 5% after-tax growth rate to the value of any tax deductions.

Back to Financial Education Center Retirement

TAX-DEDUCTIBLE IRA
Who's Eligible	Individuals who do not participate in an employee-sponsored plan or (in 1998) those with modified adjusted income of less than $30,000 and couples with modified adjusted income of less than $50,000* (for 1999, $31,000 and $51,000, respectively).
Annual Contribution	$2,000 tax-deductible
Withdrawals	Withdrawals taxed as income. Penalty-free withdrawals permitted before age 59 1/2 for first-time home expenses up to $10,000, educational expenses, or in event of disability.
Account Value After 10 Years	$29,573
ROTH IRA
Who's Eligible	Eligibility phases out between $95,000 and $110,000 in modified adjusted gross income for individuals, and $150,000 and $160,000 for couples.
Annual Contribution	$2,000 not tax-deductible
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 expenses up to $10,000. Penalty-free, but not tax-free, withdrawals permitted before age 59 1/2 for educational expenses. Tax- and penalty-free withdrawals of any conversion contributions (not gains) after five years.
Account Value After 10 Years	$31,291
NONDEDUCTIBLE IRA
Who's Eligible	Everyone
Annual Contribution	$2,000 not tax-deductible
Withdrawals	Withdrawals taxed as income. Penalty-free withdrawals permitted before age 59 1/2 for first-time home expenses up to $10,000, educational expenses, or in event of disability.
Account Value After 10 Years	$28,130
Source: Arthur Andersen, Merrill Lynch Private Client Marketing. *These income caps will gradually increase to $50,000 for singles by 2005 and $80,000 for couples by 2007. $2,000 annual contributions at 8% growth rate. Assumes that contributions are made on the first day of each year and that withdrawals are taken at the end of the contribution period. Assumes a constant 28% tax rate throughout the projection period and assigns a constant 5% after-tax growth rate to the value of any tax deductions.