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Self Directed Traditional IRA vs. Self-Directed Roth IRA
(Tax Deferred vs. Tax Exempt)
A truly Self-Directed IRA gives you total decision making power. With this comes the freedom to choose for yourself which type of IRA is right for you. The main difference between these two types of IRAs is the way the government deals with the taxes.
A Self-Directed Traditional IRA is a tax deferred account. All earnings (accumulated interest, dividends, and capital gains) are taxed when they are withdrawn from the account.
A Self-Directed Roth IRA has the potential for all earnings to be tax free if you follow certain guidelines.
There are advantages and disadvantages to each type. You can enjoy tax-advantaged retirement savings with both types of accounts.
Profile of a Traditional IRA
Tax Advantages
-Tax-deductible contributions- exceptions if you or your spouse has a 401k,403b, or pension plan. If so the amount you can deduct depends on your adjusted gross income (AGI).
-Tax-deferred earnings- earnings are not taxed until distributions are taken.
Eligibility
-Income Limitations- based on MAGI (modified adjusted gross income)
Full Contribution: Single $52,000 Married $83,000
Partial Contribution: Single $62,000 Married $103,000
Contributions
-Annual Contributions limits are:
2007- $4000
2008- $5000
-Catch-Contribution limits- If you are age 50 and older you can contribute $1000 per year on top of the annual contribution limit.
Distributions
-Penalty free after age 59 ½ and before age 70 ½.
Account must be open for at least 5 years.
-Exceptions to penalty-
* Higher education costs for you or a family member
* First time home buyers purchase expenses ($10,000 limit)
* Death or disability
* Qualified medical expenses
Profile of a Roth IRA
Tax Advantages
-Tax-free withdrawals- all earnings and principal are 100% tax-free!
Eligibility
-Income Limitations- based on MAGI (modified adjusted gross income)
Full Contribution: Single $99,000 Married $156,000
Partial Contribution: Single $114,000 Married $166,000
-Age Limitations- none! You can continue to contribute even after age 70 1/2.
Contributions
-Annual Contribution limits are:
2007- $4000
2008-$5000
-Catch-Contribution limits- If you are age 50 and older you can contribute $1000 per year on top of the annual contribution limit
Distributions-
-Penalty free- after age 59 ½ and unlike the traditional IRA, a Roth does not require investors to take minimum distributions after age 70½.
Account must be open for at least 5 years.
-Exceptions to penalty-
* Higher education costs for you or a family member
* First time home buyers purchase expenses ($10,000 limit)
* Death or disability
* Qualified Medical expenses
So which type of IRA is right for you?
According to Walter Updegrave at CNN Money,
“The tax rates you face prior to and at the time you withdraw your money can also determine whether a traditional IRA or Roth is a better deal.
Generally, if you expect to be in a lower tax bracket at retirement than you were when you made the contribution, then the traditional IRA is the better deal since you’re effectively avoiding tax on your contribution and earnings when the tax rate is higher and paying it later when the rate is lower.
If you expect to be in a higher bracket when you withdraw the money, then Roth is the better choice because you’re paying tax at a lower rate and avoiding tax when the rate would be higher.
And if you expect to stay in the same bracket, the Roth is the better choice because of its inherent advantage of effectively sheltering more money. As a practical matter, however, we can’t always know whether we’ll be in a higher, lower or the same tax bracket in the future.”
According to Roccy DeFrancesco of the Wealth Preservation Institute, Most people are usually best served by a Roth IRA.
You can consult your financial advisor to help you decide what's best for you.
Can I contribute to both a Traditional and a Roth IRA?
You do have the option to contribute to both a traditional IRA and a Roth IRA at the same time. The total amount contributed to all can be no more than $4000 for 2007 and $5000 for 2008.
My Way IRA– freedom to choose!
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