Course 204: Individual Retirement Accounts
The Difference Between Traditional and Roth IRAs
In this course
1 Introduction
2 How to Invest in an IRA
3 The Difference Between Traditional and Roth IRAs
4 The Roth Advantage

Many investors qualify for a tax break, either up front or when they withdraw the money from the account.

For those who qualify (consult the IRS' site to determine if that's you), a traditional IRA provides an up-front tax savings.

For example, if youare married and filing jointlyand neither you nor your spouse was covered by an employer-sponsored retirement plan, all of your contribution to a traditional IRA plancould betax deductible. (To learn about your individual situation, however, consult the IRS Web site at www.irs.gov).

You will pay taxes on your investment gains when you withdraw from a traditional IRA account. Currently, money withdrawn from your traditional IRA account is taxed as ordinary income at retirement.

The Roth IRA doesn't provide any up-front tax advantages the way a traditional IRA does. Contributions are not tax deductible. But once you begin withdrawing from a Roth IRA in retirement, all your earnings are tax-free. The only catch: You have to have invested money in this account for at least five years before you take any money out.

If you convert a traditional IRA to a Roth IRA, you'll pay taxes on deductible contributions and earnings made up to the point of conversion. But as soon as the money is placed in a Roth, it grows tax-free. (Note: The Tax Increase Prevention and Reconciliation Act of 2005 allowed anyone, regardless of income level, to convert a traditional IRA to a Roth IRA in 2010 and beyond.)

Next: The Roth Advantage >>


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