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Which IRA is best for you?
A Traditional IRA is a great solution if you have earned income and are under age 70.5. Contributions may be tax-deductible, and taxes on earnings are deferred until the funds are withdrawn.
A Roth IRA is an alternative to a Traditional IRA. There are no age limitations; however, you must meet certain income requirements to qualify. Roth IRA contributions are made with after-tax dollars, but funds invested an grow tax-deferred, and qualified withdrawals can be made tax-free.
Whether you contribute to a Traditional IRA or Roth IRA, steer clear of potential tax penalties. There are three areas where tax penalties may apply, but it's easy to avoid them.
1) Early withdrawal. As a rule, you need to be age 59.5 before you start withdrawing money from a Traditional IRA. Otherwise, you will pay a 10% penalty on top of any income taxes you may owe on the money. With a qualified Roth IRA, you can make tax-free and penalty-free withdrawals of contributions at any time, although to withdraw earnings, you must be 59.5 and your account must be open for five years.
2) Over funding. You can contribute as much as $4000 to a Traditional or Roth IRA this year, $5000 if you are age 50 or older. If you contribute more than the maximum, you will need to pay 6% in annual excise taxes on the extra amount, and you'll owe taxes on any earnings.
3) Required minimum withdrawals. Typically, you must start taking money out of your Traditional IRA no later than the year after you turn 70.5. You may want to consult a tax advisor for help in deciding how to calculate your required withdrawals. If you don't withdraw enough, you'll owe a 50% penalty on the shortfall.
Category: Investing401k First, Then IRA was written by:Author:Jonathan GrayAdded: Wed, 22 Aug 2007 19:03:28 -0400 This Article Has Been Read 361 times View all Jonathan Gray's articlesAbout the Author: Jonathan Gray owns and operates http://www.ira-assist.com Ira Account |
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