What is the difference between a traditional IRA and a Roth IRA – and which is right for me?
The traditional IRA (individual retirement account) was created in 1974 to assist working taxpayers struggling to build a sufficient “nest egg” for retirement. In 2008 and 2009, a taxpayer may deduct up to $5,000 in contributions to a traditional IRA ($6,000 if that taxpayer is 50 or over) – if that taxpayer is not covered by any other pension plan, like a 401(k). The taxpayer pays taxes on the contribution (and its earnings) only when it is withdrawn, when, theoretically, that taxpayer would be retired and thus in a lower tax bracket. Withdrawals before age 59.5 carry a 10% penalty. By contrast, the Roth IRA, which started in 1997 as part of the Tax Relief Act of 1996, allows no income tax deduction at all. But there are two huge advantages of the Roth IRA – first, there is no penalty for early withdrawal of contributions, and, second, earnings are never taxed, assuming they are not withdrawn until the taxpayer reaches age 59.5. However, there is one major hurdle to establishing a Rot
