Retirement Plans (Part 2) – IRAs: Roth vs Traditional

Traditional IRA

The traditional IRA is essentially an individual savings plan. Contributions are tax-deductible (when requirements are met), with an annual limit. Although earnings within the traditional IRA grow tax-deferred until withdrawal, they will be taxed when withdrawal begins—and this must happen by the time the owner reaches the age of seventy and a half years. If the required amounts are not withdrawn at that age, a 50 percent penalty will be assessed on the amount not taken. The annual contribution limit is $5,000 for 2009. If you will be 50 or older by the end of the year, you can contribute an extra $1,000, for a $6,000 total contribution limit.

Roth IRA

The Roth IRA began in the 1998 tax year, a result of 1997’s Tax payer Relief Act. A Roth IRA gives individuals the ability to invest post-tax income (up to a specified amount) each year. Roth IRA earn ings grow tax-free, and withdrawals may be made free of penalty after the owner reaches the age of fifty-nine years six months, as long as the funds have been in the account for a minimum of five years. While contributions to a Roth IRA are not tax-deductible, a Roth IRA has an advantage on the back end, with fewer requirements and limitations regarding withdrawals. The annual contribution limit is $5,000 for 2009. If you will be 50 or older by the end of the year, you can contribute an extra $1,000, for a $6,000 total contribution limit.

Is Your Retirement in Fashion?

Most people save for retirement in one fashion or another—paying Social Security taxes, saving in company retirement plans such as 401(k)s, or through their company’s pension plan. Just as you need to define your savings intentions, you need to define the purpose of your saving for retirement. What are your motives? Is this reasonable planning, exercising foresight, or are you just trying to replace God’s hand? How is having a big fat retirement plan any different from the rich fool who was storing up for his later years so he could live in comfort and security?

What is a reasonable amount to save for retirement? At what point does responsible saving cross the line and become hoarding? The goal of much retirement planning is to provide a regular monthly interest income sufficient to meet all your needs without ever touching the principal that generates the interest. This way, it’s nearly impossible to outlive your money. It is one thing to save, but there still needs to be a point where you decide when you have more than enough.

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  1. Jay, I realize that this wasn’t necessarily intended to be an all-inclusive list in comparison between the two types of IRA – but it seems that one of the very important components of the Roth IRA was passed over… and that is the ability to withdraw your contributions at any time for any reason with no tax or penalty. This becomes a useful source for home down payments, college funding, and emergency funds – in all cases after all other sources are exhausted!


  2. RD @ Money blog

    So i guess if your current tax rate is less Roth IRA becomes a good option?