Many workers have a retirement savings account through their employer’s 401 or 457 plan. But does it make sense to also have an IRA? If so, when should you start saving in one? And, which one is the right one for you?
You can contribute up to $5,000 to either a traditional IRA or a Roth in 2010 (you can contribute $6,000 if you’re 50 or older).
- Traditional IRA. The tax benefits of a traditional IRA are a lot like those of a 457 or 401 plan: Your earnings grow tax-deferred until you withdraw the money in retirement and, depending on your income level, your contributions may be tax-deductible. The traditional IRA, however, doesn’t have the flexibility of a 457 — you’ll generally owe a 10 percent penalty for withdrawals before age 59½.
- Roth IRA. A Roth IRA is very different. There is no up-front tax break, but you won’t owe any income taxes on the earnings if you withdraw the money after age 59½ and have had a Roth for at least five years. And you can withdraw your contributions at any time tax- and penalty-free. These tax-free withdrawals are most valuable if you expect to be in a higher tax bracket when you take out the money. A Roth IRA is also a good choice if you plan to keep the money in the account for a long time — it has no minimum distribution requirements at any age, and your heirs can inherit money from your Roth without owing income tax.
Whether you qualify for a Roth depends on your income. In 2010, you can contribute up to $5,000 to a Roth IRA (or $6,000 if 50 or older) if your modified adjusted gross income is less than $105,000 if single, or $167,000 if married filing jointly. The contribution amount is gradually phased out until your income reaches $120,000 if single, or $177,000 if married filing jointly.
Need help choosing between a traditional and a Roth IRA? This calculator can help you get started.
2 Comments:
It's always a good idea to max out contributions on your defined contribution plan first.
If your employer matches your contribution you should contribute up to the match because that’s free money and then to a Roth IRA if you can afford it and met the requirements for a Roth to the max. If you have additional money available then go back to your 401k or 457 or 403b.
Taxes are going up and they will be a lot higher in the future than what they are now. Our government is spending money like it’s going out of style and there is no talk of any spending cuts. At the end of the previous administration the national debt was almost 10 trillion dollars. It took us from George Washington's time to then to get to 10 trillion and the current administration expects to get the national debt up to 20 trillion in 10 years.
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