Tax Tip of the Week
For the week of April 26, 2004

Traditional IRA, Roth IRA, or no IRA?

This year you can contribute up to $3,000 to an IRA, or $3,500 if you've reached age 50. But after last year's tax cuts, is an IRA still a good investment? If so, should you choose a Roth or a traditional IRA? Here's a summary of the key issues to consider.

Upfront deduction — The traditional IRA offers an upfront tax deduction, provided you meet certain income and other requirements. Because the deduction lowers your adjusted gross income, it might also help you meet the thresholds for other tax breaks. There's no deduction for Roth contributions.

Tax-sheltered earnings — Your earnings in the accounts grow free of taxes in both types of IRAs.

Retirement distributions — Your withdrawals from a traditional IRA will be taxed as ordinary income. Withdrawals from a Roth IRA are generally tax-free.

Age limits — You can't contribute to a traditional IRA once you reach age 70½, and you must then start taking minimum distributions each year. There are no such limits on a Roth IRA. With some exceptions, both have penalties for withdrawals made before age 59½.

Income limitations — You can't have a Roth IRA if your income exceeds certain amounts. Income limits apply to a traditional IRA only if you or your spouse also has a company pension plan.

No IRA — Depending on your age, income, current, and future tax brackets, regular taxable investments may be a better choice than an IRA. You'll pay tax at a maximum rate of 15% on dividends and capital gains, compared to ordinary income rates for traditional IRA withdrawals.

The right IRA decision depends on individual circumstances. Let us help you make the best choice by preparing an analysis for your specific situation.

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