Making sense of all the IRA Options

The Individual Retirement Account, better known as the IRA Account, is a method of saving for

retirement that allows you government-approved tax deferral or tax sheltering of funds. There two main

types of IRA accounts with a few specialty situations that are not commonly used. The two main

accounts are the Traditional IRA and the Roth IRA.

Again, the Traditional IRA account is essentially a savings account with the benefit of tax deferral. This

means that retirement moneys you put into the account that are pre-tax in nature don’t get taxed right

away. Instead, they are taxed at your income tax rate at the time you take the funds out (the withdrawal

is called a “distribution”).

The common thinking is that while you are working you will be likely at your highest tax brackets during

your career. When retired and not working, you will be at lower tax brackets in terms of income tax, and

so you will be taxed less on your retirement funds withdrawn at that time.

An added benefit of the Traditional IRA is that in some cases you can use your deposits to the IRA

account as a tax deduction on your current income tax owed. Depending on your total level of adjusted

gross income, some or all of your deposits may be deductible.

The main benefits of a Traditional IRA work best on funds that are pre-tax. This means income tax

withdrawals for federal and state taxes have not yet been taken out. Many employers offer 401Ks.

However, when you depart from the employer you will need to put the money in a similar type of

retirement account or your savings get taxed. Many folks rollover their 401K savings to a Traditional IRA

to preserve the tax deferral benefit until the funds are really needed.

While you can technically deposit post-tax funds into a Traditional IRA, it doesn’t make a whole lot of

sense today given the Roth IRA (see next page). You then have to figure out how much of your deposits

are post-tax versus pre-tax, and document this for the IRS so you don’t get taxed again on the funds

when withdrawing years down the road.

Traditional IRA Accounts are administered and deposited with financial institutions who take on the role

of a “custodian.” This legal term means the institution makes sure you follow the retirement account

rules and reports your activity independently to the IRS when necessary. Traditional IRAs can be in the

form of cash savings, stocks, precious metals, bonds, and in some cases even real estate.

Traditional IRA Accounts do have catch-up provisions. In essence, if you didn’t fully deposit your allowed

amounts in previous years or your account was opened just recently after age 59, then you can deposit

a bit more than regular retirement savers. For 2010 the limits are $5,000 and $6,000 for those over 50.

In terms of withdrawals, Traditional IRA Accounts require that funds are taxed at your current income tax

bracket. In some cases institutions will withhold the taxable amount if above a certain level of

withdrawal.