Roth Vs IRA

Most people have a problem in choosing between Roth and IRA and for some it becomes an easy decision because of their income level or their employee may provide them 401K which makes them ineligible for tax deductible traditional IRA, so they choose Roth.

Traditional tax -deductible IRA: Eligibility criteria:

The fist thing to ponder is to find whether you or your spouse is under an employer’s retirement plan, if yes then you are eligible for contributing to IRA.

If you are under a retirement plan then your IRA contributions would be reduced when the modified gross income reaches these amounts:

  • Greater than %75000 and less than $85000 if married filling jointly or a qualified widow(er)

  • Greater than $50000 but less than $60000 for a single person or head of household.

  • Less than $10000 for an individual who is married and files a separate return.

  • If your spouse is under a retirement plan then the adjusted gross income would be:

$150000, if married and filing jointly and $10000 if filling separately.

IRA limit for the year 2006 was $4000(for earnings greater than or equal to $4000.

Roth IRA: Eligibility criteria:

Roth is a more flexible format in this one can establish and still contribute to Roth IRA even though you may be in some retirement plan such as 401k.

IN 2006 one can contribute $4000 as long as the income doesn’t exceed

  • $110000 if the person is single or head of household or married and filling separately.

  • $160000 if the person is married and filling jointly or a qualified widow(er).

  • $10000 if the person is married and has lived with his spouse at any time of the year.

Is Roth IRA beneficial?:

In case of traditional IRAs one has to pay taxes for both contributions and earnings. These taxes are to bee paid at the time of withdrawal.

Incase of Roth IRA taxes are to be paid only on contribution and earnings are always tax free.

Whether a person will be benefited by traditional IRA or Roth IRA would depend upon the number of years he makes contribution toward retirement funds.

Converting from Traditional IRA to Roth IRA:

This can always be done but taxes have to be paid on the amount being converted at that time.

Other details:

One can setup IRA with various financial institutions authorized by Internal Revenue Code. The last date for contributing to IRA is April 15 of every year.