Choosing The Right IRA Plan

When you begin looking into IRA plan options it's easy to become completely overwhelmed by all the different choices and options. Things are quite simple if you don't own a small business, then you will narrow your choices to a Roth or Traditional IRA.

A Traditional IRA - If you choose this plan, you deduct your initial contributions off your taxes, so it reduces your income tax burden for that year. If you contribute $3500 it reduces your reportable income by $3500 so it's a nice dollar for dollar deduction. Tax deferred growth is the 2nd big advantage, you don't have to pay any taxes on the capital gains or interest earned in this account until you reach retirement. This means that your balance can grow faster because all the money your money is working for you instead of having to be withdrawn for taxes. Since you were able to deduct the original contributions the downside of this plan is that everything you withdraw later on is taxable. If you try to withdraw money before 59 1/2 you will also incur a 10% penalty unless you meet one of the exceptions.

The Roth IRA Plan has one primary difference from the other IRAs in that the contribution is done with after tax money so it's not deductible from your taxes. So if you are looking for a way to reduce the income taxes you pay this year, this isn't the right plan for you. The benefits are that in addition to having your money grow tax deferred until retirement, your withdrawals from this plan are not taxable. This is an incredible benefit when you stop and think about it.

The Traditional IRA and Roth IRA Contribution Limits for 2010 and 2011 are $5000 for those under 50 years old and $6000 for those 50 or above by the end of the contribution year. It's also good to check the IRA Rules to see if you are within the Adjusted Gross Income eligibility guidelines as well, especially if you contribute to another retirment plan. It's best to check the Roth IRA Rules as well if you choose to contribute to a Roth account as they have their own limitations based on your Modified AGI.