Roth vs. Traditional IRA

With a traditional IRA, contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances, and generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed.

For 2013, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of:

• $5,500 ($6,500 if you’re age 50 or older), or
• your taxable compensation for the year.

The IRA contribution limit does not apply to:

• Rollover contributions
• Qualified reservist repayments

A Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to a traditional IRA.

• You cannot deduct contributions from a Roth IRA.
• If you satisfy the requirements, qualified distributions are tax-free.
• You can make contributions to your Roth IRA after you reach age 70 ½.
• You can leave amounts in your Roth IRA as long as you live.
• The account or annuity must be designated as a Roth IRA when it is set up.

The same combined contribution limit applies to all of your Roth and traditional IRAs. Your Roth IRA contribution might also be limited based on your filing status and income.

So, how do you know which one to choose? These are some of the factors to take into consideration:

• Deductibility–contributions to Roth IRAs are never deductible, so if you want to get tax deductions on your contributions to your IRA, you will want to choose a traditional IRA. Your eligibility to deduct traditional IRA contributions depends on whether you meet certain criteria.
• Contribution age limitations–there is no age limit for contributing to a Roth IRA, while you have until age 70 1/2 to contribute to a traditional IRA.
• Income–income caps don’t apply to a traditional IRA, whereas your income must fall under a certain limit to contribute to a Roth IRA
• Tax treatment–distributions from a traditional IRA are treated as ordinary income and may be subject to income tax. Early distributions are also subject to tax. Roth IRA distributions are tax and penalty free. Roth IRA distributions are considered qualified if they meet the following requirements:
• A distribution is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
• The payment or distribution is:
• Made on or after the date you reach age 59½,
• Made because you are disabled,
• Made to a beneficiary or to your estate after your death, or
• Used to purchase a first home (up to a $10,000-lifetime limit)

The Roth IRA may be a better choice if your tax rate after retirement will not be lower than it is now. A traditional IRA may be better if your tax rate will be lower than it is now.

Contact a Mountain West IRA professional to establish either a self-directed traditional or Roth IRA.