Confused about which is best: Roth IRA versus the Traditional IRA?

With all you've heard about Roth IRAs, deductible IRAs, non-deductible IRAs, etc., are you a bit confused about what's best for you?

Here's a quick overview, straight from the IRS.

First, the main point of the Roth IRA is that you don't pay income tax on qualified withdrawals—not even on the gains, dividends and interest that build up-- if you are age 59½ or older, and the account has been open for five years. Tax-free withdrawals are also allowed for first-home purchases ($10,000 lifetime cap) or upon death or disability. Again, the five-year requirement applies.

You can't deduct a Roth IRA contribution from your taxable income, but it's still an excellent choice for future tax savings.

Roth IRAs and Traditional IRAs

You can convert money to a Roth IRA from a traditional IRA to save taxes on future earnings.

The taxable portion of the money withdrawn from your traditional IRA must be included in your taxable income for the year of the allowable conversion. However, you are exempt from paying the 10% additional tax on early withdrawal. This conversion is not allowed if your Modified Adjusted Gross Income is over $100,000, or if your filing status is married, filing separately.

You don't pay tax on a Roth IRA for qualified distributions. Not even on future gains.

A Traditional IRA is still the top choice for immediate tax savings.

You're probably familiar with the benefits of a Traditional IRA. If you qualify, you can deduct your contributions to this type of IRA from taxable income, and save on taxes the same year. Generally, you don't pay tax until you make withdrawals— usually after retirement. But then, unless you made non-deductible contributions, the total amount withdrawn is included as part of your income.

Unlike a traditional IRA, a Roth IRA has no "age 70½" rule.

You can make contributions to a Roth IRA at any age if you have taxable compensation. And the traditional IRA requirement that you start making withdrawals at age 70½ does not apply to a Roth IRA.

Qualifications for the Roth IRA:

The maximum Roth IRA contribution of $2,000 per year is allowed for individuals of any age with taxable compensation and Modified Adjusted Gross Income below $150,000 for married filing jointly; $95,000 for a single taxpayer, head of household, or married filing, separately (if you did not live with your spouse at any time during the year); or $10,000 for married filing separately (who lived together during the year).

This maximum phases out between $150,000 to $160,000 for married filing jointly, or $95,000 to $110,000 for a single taxpayer, head of household, or married filing separately (if you did not live with your spouse at any time during the year). For married individuals filing separately, who lived together during the year, the phase-out is from $0 to $10,000.

Participation in an employer's retirement plan does not affect your eligibility for a Roth IRA.

Note:

Total contributions to all traditional and Roth IRAs, other than employer contributions, cannot exceed $2,000 per taxpayer per year.
You can still rollover money from an employer's qualified retirement plan to a traditional IRA, but you cannot convert such funds directly to a Roth IRA.