|
WITH THREE FLAVORS to choose from — Roth, deductible or nondeductible — figuring out which IRA is best for you can be confusing. So let us make this simple: If you qualify for a Roth (see table below), this is almost always the way to go.
That said, let us reiterate that if your employer offers a 401(k) plan with a match, you should always max it out before considering any type of IRA (see How to Make the Most of Your 401(k)). But after that, a Roth will typically give you the best bang for the buck. The applet below will let you see for yourself. It compares the potential gains in a Roth, a nondeductible IRA and a tax-deductible account.
Why is a Roth better? Unlike traditional IRAs (both tax-deductible and nondeductible), withdrawals from Roth IRAs after age 59 1/2 aren't generally taxed. You pay your taxes on the front end by contributing after-tax dollars. So Roth IRAs enable savers who remain in the same income tax bracket at retirement to accumulate more money than even tax-deductible IRAs do.
They're also more flexible. With a Roth, you can withdraw contributions (but not gains) for anything you want, penalty- and tax-free. College, home down payments, expenses related to a disability — you name it. The one big restriction is that you'll generally have to wait five years to withdraw conversion contributions from a traditional IRA.
The only problem with a Roth is that you might not qualify. Who does? Joint filers with adjusted gross income (before IRA contributions) below $160,000, and individuals with adjusted gross income below $110,000. (Eligible contributions start to phase out at $150,000 for joint filers and $95,000 for individuals.)
If you do qualify for a Roth, you can make annual contributions of $3,000 a person ($2,000 for 2001). And if your adjusted gross income is under $100,000, you can also convert money from other IRA accounts into a Roth. You'll have to pay taxes upfront, but over the long term, you'll probably end up earning a lot more. For more on how conversions work, see Roth IRAs: To Convert or Not.
The IRA Buffet
|
TAX-DEDUCTIBLE IRA |
|
Who's Eligible
|
In tax-year 2002, eligibility phases out for individuals with MAGI between $34,000 and $44,000 and for married couples with MAGI between $54,000 and $64,000* (for 2001, between $33,000 and $43,000
for singles, between $53,000 and $63,000 for couples). No income cap for individuals not covered by an employer-sponsored retirement plan or for married couples when neither participates in such a plan. If only one spouse participates in an employer-sponsored plan, IRA eligibility phases out between MAGI of $150,000 and $160,000 for uncovered spouse, between $54,000 and $64,000 for covered spouse ($53,000 and $63,000 in 2001). If covered spouse files separately, phase out is between $0 and $10,000.
|
| Annual Contribution |
$3,000 tax-deductible ($2,000 for 2001) |
| Withdrawals |
Withdrawals taxed as income. Penalty-free withdrawals permitted before age 59 1/2 for first-time home purchase up to $10,000, higher education expenses or in event of disability or death. |
| Account Value After 10 Years** |
$44,360 |
|
ROTH IRA |
|
Who's Eligible
|
Eligibility phases out between MAGI of $95,000 and $110,000 for singles, and $150,000 and $160,000 for married couples.
|
| Annual Contribution |
$3,000 not tax-deductible ($2,000 for 2001) |
| Withdrawals |
Tax-free and penalty-free withdrawals of earnings plus contributions after five years if you are 59 1/2 or in the following circumstances: death, disability or for first-time home purchase up to $10,000. Penalty-free, but not tax-free withdrawals permitted before age 59 1/2 for higher education expenses. |
| Account Value After 10 Years** |
$46,937 |
|
NONDEDUCTIBLE IRA |
|
Who's Eligible
|
Everyone who has earned income.
|
| Annual Contribution |
$3,000 not tax-deductible ($2,000 for 2001) |
| Withdrawals |
Withdrawals of earnings taxed as income. Penalty-free withdrawals permitted before age 59 1/2 for first-time home purchase up to $10,000, higher education expenses or in event of disability or death. |
| Account Value After 10 Years** |
$42,195 |
*These income caps will gradually increase to $50,000 for singles by 2005 and $80,000 for couples by 2007.
**$3,000 annual contributions at 8% growth rate. Assumes that contributions are made on the first day of each year and that withdrawals are taken at the end of the contribution period. Assumes a constant 28% tax rate throughout the projection period and assigns a constant 5% after-tax growth rate to the value of any tax deductions. |
|
