Daily Deduction: Roth vs. Traditional IRAs

Given the number of times we've written about the subject, hopefully you're familiar with the basic difference between a Roth IRA and a traditional IRA.

If this has escaped you, however, here's a brief refresher: Contributions to a traditional IRA are deductible, and contributions to a Roth IRA are not. Plus, when you retire and receive distributions from a traditional IRA, they are taxed. When you receive them from a Roth IRA they are not. So you have a choice: Be taxed on your retirement savings now, or later.

That's the most known difference between the two, but we'll help you fill in the details, so that you can make a truly informed decision about which retirement account is best for you.

Contributions

Tried and true, the traditional IRA works like a savings account. Each year, you make a contribution. Your contributions are invested inside the account, and if your account earns money, it's not taxed. The lack of tax on your investment earnings allows your money to grow bigger faster.

And that's not all. You could contribute up to $5,000 in 2008, and contributions to your account are deductible. In order to fully deduct contributions to a traditional IRA in 2008, your adjusted gross income must have been $53,000 or less as a single person or $85,000 or less as a married person filing jointly. Furthermore, if you're over the age of 70-1/2, forget about contributing to your traditional account: It's not allowed.

Fortunately, there is no age limit on a Roth IRA, and the income limits for Roths are much higher. So if you earn too much income to contribute to a traditional account, don't give up yet. Although no deduction is permitted for contributions to a Roth IRA, your investment will still grow tax free inside the account. Even better, your contributions and earnings won't be taxed when they are distributed to you.