IRAs in your 40s, 50s, 60s, and 70s

For years, Individual Retirement Accounts (IRAs) have been touted as a smart way to sock away long-term savings. Now you have two choices: the traditional, tax-deferred IRA and the tax-free Roth IRA.

Here's how they work:

Working individuals can contribute up to $2,000 a year and married couples up to $4,000 -- to a traditional IRA. In some cases, their contributions are tax deductible. The funds grow tax-deferred until withdrawn -- presumably in retirement -- when they will be taxed as regular income.

With a Roth IRA, there is no up-front tax deduction for the annual contribution up to $2,000 for singles and up to $4,000 for married couples, but the money can be withdrawn tax-free in retirement. However, there are income limits, so not everyone can participate in this new kind of retirement savings plan.

You may contribute the full amount to a Roth IRA if your AGI falls under $95,000 for a single return, and $150,000 on a joint return. The upper limit to contribute anything to a Roth is set at $110,000 for individuals, and $160,000 for couples. If your AGI falls in between these income figures, you can only add a portion of the $2,000, depending on how much income you have. For example, an individual with $155,000 can put $1,000, half of the $2,000, into a Roth IRA account.

Do you qualify for the Roth?

See At-A-Glance: The Roth IRA vs. the Traditional IRA for a quick summary of income limits and other basics of IRA investing.

So which is the better investment? For most working couples, the long-term benefits of being able to withdraw tax-free funds in retirement more than outweigh the cost of the up-front taxes on the Roth. For example, here's a comparison of the after-tax earnings for couples with a combined adjusted gross income of $73,500, in the 28% federal tax bracket, who make the maximum $2,000 IRA contribution every year for 20 years.

The Traditional IRA (tax-deferred income) (taxed at 28% upon withdrawal) $40,000 x 8% rate of return over 20 years = $83,795.34

The Roth IRA (tax-free upon withdrawal) $40,000 x 8% rate of return over 20 years = $91,523.93

If these figures make you want to convert your traditional IRA to a Roth IRA immediately, think twice. In this case, the benefits of tax-free withdrawal are clear. But if this couple expected their tax bracket to drop to 15% on retirement, the picture would change. Also, your adjusted gross income, whether married or single, must be under $100,000 to convert a traditional IRA to a Roth IRA, and you will have to pay income taxes on any funds you convert. If you do elect to convert your present IRA to a Roth, you'll be able to spread the tax bite over the next four years as long as you authorize the conversion in 2000. Converting existing funds to a Roth IRA may be too costly for some people, particularly those with large nest eggs who may be close to retirement. But most people would benefit from opening a new IRA in 2000.

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