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Which IRA Is Best: Find Out Why Many Convert From Traditional to Roth IRA

January 18, 2012 | Comments: 0 | Views: 131

Whether you are an employee or a self employed individual, as long as you are earning a regular income, you are eligible to open an individual retirement account (IRA) to add up to your retirement savings when you retire. You can open your IRA with any custodian institution such as a mutual fund company, a bank, credit union, brokerage and other entities which are authorized by law. There are two basic types of IRAs for individual tax payers classified as Traditional IRAs and Roth IRAs. For retirement plans sponsored by employer, they are termed as SIMPLE IRAs and SEP IRAs.

The main advantage of the Traditional IRA over the Roth is that contributions and account transactions are often tax-deductible including capital gains, interest and dividends. Eligibility requirements depend on income, filing status, and availability of other retirement plans. Your asset is only taxed upon your withdrawal and if you belong to the lower tax bracket, the traditional IRA offers a better incentive than the Roth. You are allowed to make tax exempt withdrawals for first time home purchase, higher education expenses or in case of disability. In short, the traditional IRA is a pre-tax deal.

With Roth IRA, it is the opposite because it is a post- tax deal. Roth is a very flexible investment tool. You are not required to withdraw your money when you reach a certain age. You can participate in one whether or not you are already covered by an employer retirement pension plan. As long as your retirement account has been valid for 5 years, you can make tax free withdrawals of the principal plus the earned dividends after age 59.

It can also be tax exempt when withdrawals are made before age 59 when proceeds are for disability and/or first time home purchase. There is a lifetime tax free distribution limit up to $10,000. The advantage of a Roth IRA is you can make contributions even after age 70 and are not required to make mandatory distributions when you turn 70. So, with Roth IRA, after you pay your income tax, your contributions are made with post-tax money and your principal and dividend earnings grow tax free. Upon withdrawal of your retirement money, you pay no more taxes.

If you are above 50 before year end 2011, the maximum contribution to a traditional or Roth IRA account is the lesser of $6,000 or the amount of your taxable income in calendar year 2011. The same rule applies to those over 50 with the combined limit of $6,000 available for splitting between a traditional IRA and a Roth IRA. In 2011 the maximum traditional IRA and Roth IRA deductible contribution could be reduced based on your modified adjusted gross income. There is a different rule if you are below 50 before year end 2011.

The question at the tip of people's tongues or at the back of their minds is which IRA is best? Is it the Traditional or the Roth? Both have advantages and disadvantages. If you will be asked to decide, it is most likely that your decision will be in favor of the ROTH IRA. As of now, many people are doing Roth Ira conversions from the traditional or 401k and one of the reasons is because the restrictions for those investors with above the annual income limits were modified and liberalized opening up the Roth IRA to them.

Therefore, which IRA is best? Work out with a professional CPA or an IRA expert and use a retirement income or IRA calculator tool to make your own valuable assessment which arrangement you prefer! There are different strategies used by Roth IRA financial experts like Robert Keeble and Ed Slott, such as re-characterization, conversion timing, re-conversion, etc. You can read their books, attend an Ira workshop and go over plenty of articles in the web about why more and more people are doing conversions to Roth IRA and switching back to traditional if the IRA account value has dwindled. So, this is not a simple matter but a complex issue. Deeper understandings of the concepts as well as each tax payer's circumstances play a significant role in the implementation of these IRA investment tools.

My name is Alex DeGuzman and I am an expert in retirement plans 401k. Please visit my site at to find the best retirement funds to secure your retirement years.

Source: EzineArticles
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