Insider Jeff Fleming

Which will it be, a traditional IRA or a Roth IRA? Jeff Fleming discusses some of the pros and cons of each.

Tax-deferred or tax-free investing can make a significant impact on the quality of your retirement. Let's look at an example: An annual investment of $2,000 per year for 20 years earning 10 percent tax-free or tax-deferred will grow to over $114,550. Compare that to $91,524 if the annual growth is subject to income taxes at an assumed effective rate of 20 percent.

This is not the whole picture though. If the investment can be acquired before taxes, such as with an IRA or 401(k) plan, then the investment of the tax savings can add thousands of dollars to the investment pot.

This leads us directly to the debate of whether to put money into a traditional IRA, which is pre-tax money growing tax-deferred, or a Roth IRA, which is post-tax money growing tax-deferred.

As is so often the case, either one might be the better alternative for any particular investor depending upon his or her objectives. Calculators, such as the ones on Quicken.com and ThirdAge, are readily available on the Internet to help you determine which one will provide you with the larger amount of money net of taxes. But there are a few other considerations equally important:

• Unlike traditional IRAs, which require you to pay taxes as soon as you begin making withdrawals, Roth IRA withdrawals are tax-free once you reach age 59 1/2.

• Likewise, upon the death of the participant in a traditional IRA, the beneficiaries will be responsible for paying income taxes on the full amount that they receive from the IRA. On the other hand, the Roth IRA receives a stepped-up basis and will not be subject to income taxes.

• Assets in a traditional IRA must be distributed beginning at age 70 1/2 whether you need the money or not. A Roth IRA is advantageous because it is not subject to minimum distribution rules. This means that you can leave the money in the IRA until death, at which time it would be distributed income tax-free to the designated beneficiaries.

• Lastly, if you continue to have earned income beyond age 70 1/2 and wish to continue your IRA contributions, your only IRA choice is the Roth.

Should I Add to My IRA?

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