Traditional IRA Profile
1· Tax deductible contributions (depending on income level - See IRS Publication 590 for more information)
2. 2011 contribution limit is $5,000 for individuals under age 50 and $6,000 for those 50 years old or older as of the end of the year (December 31st).
3· Withdraws can begin at age 59 1/2 and are mandatory at 70 1/2.
4· Taxes are paid on the earnings and the contributions you made to the IRA when withdrawn from the IRA
5· Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, real estate, etc.)
6· Available to everyone; no income restrictions
7· All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception – See next week article for exceptions).

Roth IRA Profile
1. Contributions are not tax deductible
2 No Mandatory Distribution Age.
3. 2011 contribution limit is $5,000 for individuals under age 50 and $6,000 for those 50 years old or older as of the end of the year (December 31st).
4. All earnings and contributions are 100% tax free if rules and regulations are followed
5· Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, real estate, etc.)
6· In 2011 a Roth IRA is available only to single-filers making up to $107,000 or married couples making a combined maximum of $169,000 annually.
7. Principal contributions can be withdrawn AT any time without penalty (subject to some minimal conditions).

Tax Deferred vs. Tax Free
The biggest difference between the Traditional IRA and a Roth IRA is the way the U.S. Government treats the taxes. If you earn $60,000 a year and put $4,000 in a traditional IRA, you will be able to deduct the contribution from your income taxes (meaning you will only have to pay tax on $56,000 in income to the IRS).
At 59 1/2, you may begin withdrawing funds but will have to pay taxes on all of the capital gains, interest, dividends, contributions, etc., that were earned or made since the IRA was opened.
On the other hand, if you put the same $4,000 in a Roth IRA, you would not receive the income tax deduction. You would pay tax on your earnings of $60,000. If you needed the money in the account, you could withdraw the principal at any time (although you will pay penalties if you withdraw any of the earnings your money has made). When you reached retirement age, you would be able to withdraw all of the money (the capital gains, interest, dividends, contributions, etc.) 100% tax free. Unfortunately, not everyone qualifies for a Roth IRA. A person filing their taxes as single cannot make over $95,000 and a married couple cannot make over $150,000 annually.

Future Tax Rates
Deciding to contribute to a traditional or Roth IRA should depend on whether you expect your income tax rate in retirement to be higher or lower than what you currently pay. That’s because it determines whether the tax rate you pay on your Roth IRA contributions (today’s tax rate) is higher or lower than what you’d pay on your traditional IRA’s withdrawals in retirement.
Of course, it’s hard to predict what federal and state tax rates will be 10, 20 or even 40 years from now. But you can ask yourself some basic questions to help determine your personal situation: What federal tax bracket are you in today? Do you expect your income including Social Security to increase or decrease in retirement? Although conventional wisdom suggests that gross income declines in retirement, taxable income sometimes does not. Think about it. Once the kids are grown and you stop saving for retirement, you lose some valuable tax deductions and tax credits, which could leave you with a higher taxable income in retirement.
What about tax rates? Do you expect your tax rate will be higher or lower when you retire? Given today’s historically low federal tax rates and the large U.S. deficit, many economists believe federal income tax rates will rise in the future — meaning Roth IRAs may be the better long-term choice. Why? You will be paying a lower tax rate today then you will when you retire. When you retire, you would pay NO taxes on the money you take out of your Roth IRA.
Next week on either Oct. 23 or Oct. 24, I will post an article on the exceptions to the 10% penalty. The following week on either Oct. 30 or Oct. 31, I will post an article on the 401(k) VS Roth IRA. I was a retirement specialist for 4 years. I was a tax specialist for 25 years. If you want to invest in real estate by using your retirement account, call me for details. Use someone who has knowledge of retirement plans, taxes and the local real estate market, such as myself, Leo McKittrick. I can be reached at (912)667-7355 or by email at leomckittrick@yahoo.com.

What questions do you have?