Traditional IRA
Both Traditional IRA and Roth IRA are individual retirement accounts. To create a Traditional IRA one has to have sufficient income to make contributions. The major advantage of a Traditional IRA is the tax-deductibility of the contributions. While in the account all the transactions like interest, dividends and capital gains are not subject to tax. Advantages of Traditional IRA:
1. The main advantage, as has been stated before, is that the contributions are often tax-deductible. 2. Traditional IRA offers an increased incentive if a taxpayer expects to be in a lower tax bracket in retirement than during his working years. 3. The taxpayer get the benefit from taxes immediately. Disadvantages of Traditional IRA: 1. There exist eligibility requirements for the tax-deductibility. If a person is eligible for the plan than his income must be below the specified figure. 2. All withdrawals from an Traditional IRA account become subject to federal income tax. 3. If one's disposable income is high Roth IRA shelters more assets from taxes than a Traditional URA account. 4. One of the main disadvantages is the money distributions based on age. Withdrawals MUST begin at the age of 70.5. If a required withdrawal is not made half of the sum is confiscated by the IRS. 5. If withdrawals start earlier than the age of 59.5 there exists 10% early distribution penalty. Roth IRA The contributions to Roth IRA are made only from earned income (the one that has already been taxed). At the same time withdrawals up to the total distributions are tax free. By 2008 the total amount of contributions are established at $5 000 (for a person of 49 and below) and $6 000 (age 50 and above) Roth IRA advantages: 1. An owner can withdraw a sum up to the total of his/her contributions any time. 2. Earnings are automatically qualified in the tax when the participant reaches 59.5 or becomes disabled. 3. If a Roth IRA owner dies, the spouse become the owner of the both account and can combine them without penalty. 4. The major advantage of Roth IRA is the lack of forced distributions based on age. Roth IRA disadvantages: 1. The contributions to Roth IRA are not tax-deductible. 2. The are high penalties for early withdrawals from a account. 3. The is a risk that over the next decades the Congress might decide to tax earnings on Roth IRA accounts. Simplified Employee Pensions - SEPs SEPs are individual pension plans that allow to contribute and deduct up to 20% of income (25% is you are an employee of your own organization). The amount of contributions can vary according to your annual income, though the maximum contribution cannot be more than $45 000. |
