The decision to contribute to a traditional IRA versus a Roth IRA has to do with two major factors. First, do you qualify to contribute and deduct either the traditional OR Roth IRA…both are based on income. and Second, when do you want to pay the tax.

So lets deal with the technical part, the differences between the two IRA’s and the income limitations then we’ll discuss the philosophical discussion of the tax.

Here are the basics…Part 1
The maximum you can contribute to either IRA or ROTH IRA is $5500 for under 50 years old and $6500 if you’re over 50 but no more than your earned income for the year. So if you made $3500 in wages for the year you can only contribute $3500. Also, You can contribute the $5500 all to one IRA type or spread the total amount between the two in any allocation you want.

A Roth IRA is NOT deductible currently (so you will pay the tax on the contribution which is already included in your pay) BUT you will NOT pay ANY tax on the EARNINGS of the Roth in the future. That’s NO tax due ever (unless of course they change the law, most likely if they did it would be grandfather’d in). You may not contribute to a ROTH if your income is $114K for single and $181K for MFJ, but there are no limits on income to convert your traditional IRA to a Roth IRA…more on that later.

A Traditional IRA you can deduct the contribution from your current income and reduce today’s taxes as long as you are not covered by a pension plan at work (you can check your W2 to see if “retirement box” is checked). If you’re covered by a pension plan then you have to look at your total income if its under 61K for single or under 98K for MFJ you will be able to defer the tax; if you’re between 61K-71K and 98K-118K you will get a partial tax deduction, anything over 71K and 118K no deduction will be allowed, BUT you can still make the contribution, you’ll need to complete a form 8606 filed with your return each year showing the contribution you made so at some future date when you withdraw the funds you will not have to pay tax on the funds again…IF you remember you made the non-deductible contribution.

Now for Philosophy…Part 2
The theory of most tax professionals is to postpone taxes as long as possible, assuming sometimes that your tax rate will be lower when you’ve retired, however, there is more likely a chance that tax rates will be higher in the future but this is all crystal ball kind of stuff, we don’t really know.

With the Roth IRA you pay tax now on the smaller savings contribution the theory being you will protect your larger savings amount from higher taxes . whereas the Traditional IRA you pay on everything you withdraw when you retire, dinging your savings more than the roth….(read more)

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