Should You Invest in an IRA?
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Do it if you can afford it, especially if you dont have a 401k at work. Remember that the rewards are greater the earlier you invest in an IRA. And while things may seem tight right now, its wise to start saving early because on the horizon are things like mortgage payments and Juniors college fund.
This calculator demonstrates the difference between investing your savings in taxable investments versus putting them in a traditional IRA.
Just as with 401ks, you can choose between a Roth and traditional IRA. The same general principles apply: With a Roth, you invest post-tax funds, so when you start withdrawing the funds you dont pay taxes. With a traditional IRA, you invest pre-tax funds and pay taxes on that money when you start withdrawing the funds.
The different IRAs have a jumble of rules about when you can access your money, contribution limits, and tax schedules. Heres a comparison of Roth and traditional IRAs:
| Roth | Traditional | |
|---|---|---|
| Tax-deductible contributions | Contributions are nondeductible. | Fully deductible, as long as you and your spouse arent covered by a retirement plan at work. Then, your deduction depends on your income level and filing status. |
| Required withdrawals | No | Once you hit age 70 , you must take the required minimum distributions. |
| Age limits on contributions | No | No contributions allowed after you reach age 70 . |
| Withdrawal penalties | None for qualifying withdrawals | A 10% penalty if you are younger than 59 , although there are exceptions for leaving a job early, higher education expenses, and other scenarios. |
| Rollovers | 401ks and other plans cannot be transferred directly to a Roth IRA. You must roll the money into a traditional IRA and then a Roth. | In general, no restrictions on rollovers from other retirement funds |
Theres also a new opportunity to get around some of these rules. Normally, you face an income limit if you want to convert a traditional IRA to a Roth IRA: your modified adjusted gross income must be $100,000 or less. A new law eliminates that ceiling as of Jan. 1, 2010. Plus, anyone who converts to a Roth IRA in 2010 can spread the resulting tax bill over 2011 and 2012. Consult with a tax adviser beforehand.
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