IRAs - Roth and Traditional

We're in that time of year when you can decide to put money into an IRA and choose whether to have the money be counted as a 2009 or 2010 contribution.  Here's a primer of the basic differences between contributing to a Roth or a Traditional IRA:

A.  Traditional IRA contributions are tax deductible, but withdrawals are subject to ordinary income tax in the year withdrawn.  There are required minimum withdrawals (RMDs) beginning at age 70 1/2. 

B.  Roth IRS contributions are not tax deductible, but withdrawals are tax free and there are no RMDs (unless the Roth IRA was inherited).

So, if you believe that your retirement account will grow significantly through interest, dividends and/or capital gains, you would be better off investing in a Roth IRA because of the likelihood that tax rates will be going up to pay for the recent government spending binge.  It's better to pay taxes now at the lower tax rate and get your Roth earnings tax free later, even if you expect to be in a lower tax bracket when you retire.

IRAs have income and other limits as to whether and how much you can contribute and withdrawal. One of the important things to note is that most withdrawals taken before you reach the age of 59 1/2 are subject to a 10% federal income tax penalty. Many states also tack-on an additional penalty for these early withdrawals.


Don't Forget:
Another option is investing in growth stocks outside of a tax sheltered plan ('Growth Investing').  These are not tax deductible, but the gain portions of withdrawals are generally taxed only at the favorable long-term capital gains rate, which currently ranges from 0% to 15%.  However, President Obama has proposed increasing long-term capital gains tax rates to 20% for taxpayers in the two highest income-tax brackets, while letting the 15% and 0% rates continue for those in lower brackets. 

This type of investing is most flexible in terms of life's changing needs.  You can invest and withdrawal anytime without limits or penalties, and should be a significant part of everyone's wealth and retirement planning.

What to do now:
Until April 15th, if you are eligible, consider making contributions to your IRA for 2009.  Also, because you may get the benefit of increasing value throughout the year, consider making your 2010 IRA contribution now too.

I suggest consulting with a retirement plan investment professional first.  Then, before taking action, review their suggestions with your CPA who will provide you with unbiased counsel regarding the suggested strategy.

Contact me:
kfolberg@mynetcpa.com
(262) 421-1170 Office
(877) 277-7151 Fax