Tahoe-Truckee Market Beat: What type of IRA account is right for you?
February 9, 2015
If you're thinking about funding an IRA this year, you have until April 15, or the day you file your taxes, whichever is earlier, unless you file an extension.
Which type of IRA you should establish depends on several factors, and there are calculators available online to help with the decision-making process. Your IRA account can be used to invest in stocks, bonds or mutual funds once it is opened.
The types of IRAs are the Roth and the Traditional IRA. With a Traditional IRA, your contributions are deductible from your income tax, but withdrawals are taxed as ordinary income.
The Roth IRA is typically better for younger people in a lower tax bracket. With the Roth IRA, contributions are not deductible, but the account is free to grow without taxation, and withdrawals are not subject to income tax.
The Traditional IRA rules state that you must start taking RMDs, required minimum distributions, by age 70 and a half, but with the Roth no withdrawals are required during the account holder's lifetime, which can make them a very effective wealth transfer tool.
For tax year 2014, the contribution limits are the same for both types — $5,500 or $6,500 for persons over 50 years of age.
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There are some income limits to be eligible for the Roth; they are $129,000 for single people and $191,000 for married couples.
Anyone with earned income can contribute to a traditional IRA, but the tax deductibility is based on income and whether you participate in an employer-sponsored plan at work.
Basically the decision on which type of account to use comes down to whether or not you need to lower your taxable income in the current tax-reporting year.
Lowering your adjusted gross income may help you qualify for other tax breaks, like on student loan interest or child tax credits.
If a tax break this year is not that important, the Roth might make more sense. You will have to estimate your future tax bracket to see how much benefit you might get from the Roth.
Remember, Congress can change these rules at any time, so you should be prepared for things to be different in the future. Consider consulting your financial adviser and your tax adviser for advice on your individual situation.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.