The Traditional IRA vs. The Roth IRA

This section of the guide compares the features between the two most popular IRAs and can help you determine which IRA is best for you.  Eligible individuals can contribute to a tax-deductible traditional IRA, to a non-deductible Roth IRA or to a combination of the two.  However, no more than a combined total of $4,000/$5,000 if age 50 or older in 2006 (or 100% of earned income if less) may be contributed to these accounts each year.

Individuals who are not eligible for deductible contributions to a Traditional IRA or to make contributions to a Roth IRA may still make non-deductible contributions to a Traditional IRA and receive the benefits of tax-deferred growth.

Eligibility
Traditional IRA Up to the year you turn age 70½ as long as you have earned income; a nonworking spouse of a wage earner up to the year the nonworking spouse turns age 70½.
Roth IRA Any age as long as you have earned income (subject to income limits below); a nonworking spouse of a wage earner.

Key tax characteristics
Traditional IRA Earnings grow tax-deferred; potentially tax-deductible contributions. Distributions are generally included in gross income and therefore taxable.
Roth IRA Earnings grow tax-deferred;distributions are federally tax-free if age 59½ or older and account held for five years.

Maximum annual contributions
Traditional IRA

$4,000 for tax years 2006-2007.
$5,000 for tax year 2008.
After 2008: limit adjusted for inflation in $500 increments.
Catch-up contributions for workers age 50 and older (as of year's end): $1,000 extra in 2006 and thereafter.
Roth IRA

$4,000 for tax years 2006-2007.
$5,000 for tax year 2008.
After 2008: limit adjusted for inflation in $500 increments.
Catch-up contributions for workers age 50 and older (as of year's end): $1,000 extra in 2006 and thereafter.

Tax-deductible contributions
Traditional IRA

Yes, depending on participation in retirement plans and modified adjusted gross income (MAGI).
For tax year 2006, full deductibility of contributions for active participants in a retirement plan whose MAGI is $75,000 or less (joint) and $50,000 or less (single).
For tax year 2006, partial deductibility for up to $85,000 MAGI (joint) and $60,000 (single).
Roth IRA

No.


Taxes on withdrawals
Traditional IRA

Ordinary income tax on withdrawals of earnings and deductible contributions.
No federal taxes on withdrawals of nondeductible contributions. State taxes may apply.

Roth IRA

Tax-free earnings if you hold the account for at least five years and are 59½ or older upon withdrawal, or if your withdrawal qualifies as an exception described below State taxes may apply.


Income limits
Traditional IRA

Earned income at least equal to IRA contribution.
Full deductibility of contributions if you (or you and your spouse, if married filing jointly) aren't participating in an employer-sponsored retirement plan regardless of your income.

Full deductibility of 2006 contributions for active participants in a retirement plan whose modified adjusted gross income (MAGI) is $75,000 or less (joint) and $50,000 or less (single); partial deductibility for up to $85,000 (joint) and $60,000 (single).
Roth IRA

Earned income at least equal to IRA contribution.
MAGI limits to be eligible for a full contribution: up to $95,000 for singles, up to $150,000 for joint filers.

MAGI limits to be eligible for a partial contribution: $95,001 - $110,000 for singles; $150,001 - $160,000 for joint filers.

Required distributions
Traditional IRA

Required minimum distributions (RMDs) must start in the year you reach age 70½. Beneficiaries must also take mandatory distributions.
Roth IRA

None during the IRA owner's life. Beneficiaries must take mandatory distributions.


Withdrawal penalties
Traditional IRA

10% penalty tax if you're under age 59½ and the withdrawal does not qualify as an exception to the tax (described below).

Roth IRA

For accounts held less than five years and the owner is under age 59½:
Distributions from contributions are tax-free and penalty-free.
10% penalty tax may apply on distributions from the converted assets if they do not qualify as an exception

The 10% penalty tax may apply on distributions of earnings if they do not qualify as an exception.

Early withdrawal penalty tax

You will pay a 10% penalty on a premature withdrawal unless your distribution qualifies as an exception to the penalty. The penalty will not apply if the distribution is used for: