Roth or Traditional IRA? Which is the better Choice

Contribution Limits
The contribution limit for the Roth and Traditional IRAs is the same. For tax year 2003, you may contribute up to $3,000 to your IRA. You are allowed to make an additional $500 catch-up contribution if you reach age 50 or older by the end of the 2003 tax year. Here is a chart outlining contribution limits for future tax years:

Deductibility
One of the major deciding factors for taxpayers is whether or not he or she is eligible to deduct the IRA contribution. Being able to deduct your IRA contribution means that you get a tax break for the year the contribution is made. If you meet certain requirements, the amount you contribute to your Traditional IRA may be deductible.

Contributions to Roth IRAs are never deductible.

Age Limitations
You may not make a participant contribution to a Traditional IRA after and including the year you reach age 70 ½.

For Roth IRAs, there is no age limitation.

Income Limitations
You may contribute the lesser of 100 percent of your year's compensation or $3,000 (plus an additional catch-up contribution of $500 if you reach age 50 or older by the end of 2003) to your Roth or Traditional IRA. However, in order to be eligible to contribute to your Roth IRA, your income must be the following:

No more than $160,000, if you are married and file a joint tax return.
No more than $10,000 if you are married, file a separate tax return and live with your spouse for any period during the tax year.
No more than $110,000 if you file as single, head of household, or married filing separately and did not live with your spouse at any time during the tax year.

If your income exceeds the amounts indicated above, you may not contribute to a Roth IRA. In addition, your contribution limit may be reduced if your income falls within certain ranges (below the caps listed above). Consult with your tax advisor to determine the maximum amount you may contribution to a Roth IRA.

Income caps do not apply to Traditional IRA contributions.

Required Minimum Distributions
If you maintain a Traditional IRA, you must begin to take required minimum distributions (RMD) from the IRA by April 1 of the year following the year you turn age 70 ½. This means you must gradually reduce your IRA balance and add the distributed amount to your income, even if you are not in need of the funds.

Roth IRA owners are not subjected to the RMD rules.

Taxability of Distributions
Generally, distributions from a Traditional IRA are treated as ordinary income and may be subject to income taxes; furthermore, the distributed amount may be subjected to early distribution penalties if the amount is withdrawn while the taxpayer is under the age of 59 ½. On the other hand, qualified Roth IRA distributions are tax and penalty free. Roth IRA distributions are qualified if they meet the following two requirements:

1. The distributions are taken no earlier than five years after the taxpayer funds his or her first Roth IRA. This five-year period begins with the tax year for which the first contribution is made. For example, if you make a Roth IRA contribution in April 2004 for tax year 2003, your
five-year period begins January 1, 2003, because the contribution was made for 2003.

2. The distribution is taken as a result of any one of the following:

The tax payer has reached age 59 ½.
The taxpayer is disabled.
The taxpayer dies, and his/her beneficiary takes the distribution.
The taxpayer purchases a first home.

A Third Option: Splitting Your Contribution
If you are eligible to contribute to both types of IRAs, your may divide your contributions between your Roth and Traditional IRAs; however, you must ensure that the total contribution to both IRAs does not exceed the limit of $3000 (plus $500 catch-up contribution).

If you decide to split your contributions between both types of IRAs, you may choose to contribute the deductible amount to your Traditional IRA and the balance to your Roth IRA. Let's assume for example that the maximum amount you can deduct for the 2003 tax year is $2,000. You may contribute $2,000 to your Traditional IRA and the balance of $1,000 to your Roth IRA. Before making such a decision, however, you must take into consideration additional fees, such as maintenance fees charged by your IRA custodian/trustee that could result from maintaining two separate IRAs. Note also that placing bulk trades into one IRA instead of placing separate trades in separate IRAs could help you save on trade-related fees. Simply put, consider the short-term benefits as well as the long-term benefits and decide which outweighs the other.

Some taxpayers may contribute to a Traditional IRA and elect not to claim the tax deduction even though they are eligible to do so. The benefit of not taking a deduction is that the distribution of the same amount is tax and penalty free. The earnings, however, will be treated as taxable income. Further, being able to deduct your IRA contribution does not mean that you must establish and fund a Traditional IRA. You may forgo the tax benefit of taking a deduction in order to realize the benefits of a Roth IRA, such as freedom from the RMD rules and taxes, and penalty-free distributions.

The following chart summarizes the similarities and differences between the Roth and Traditional IRAs:

Roth and Traditional IRA Participant Contribution Comparison
	Roth IRA	Traditional IRA
Contribution Limit	$3,000 for tax year 2003 Plus $500 catch up for those at least 50 years old by year-end 2003	$3,000 for tax year 2003 plus $500 catch up for those at least 50 years old by year-end 2003
Deductibility	Contributions are never deductible	Contributions may be deductible, depending on tax filing & active participant status, as well as income amount
Age Limitation	No Age limitations on contributions	No contributions allowed after and including the year the taxpayer attains age 70 ½.
Tax Credit	Available for Saver's Tax Credit	Available for Saver's Tax Credit
Income caps for contributions	Income caps may prevent taxpayers from contributing.	No income caps that will prevent taxpayers from contributing.
Treatment of earnings on IRA investments	Earnings grow on a tax-free basis. Qualified distributions are tax-free.	Earnings grow on a tax-deferred basis. Earnings are added to taxable income for the year distributed.
Distributions Rules	Distributions may be taken at anytime. Distributions will be tax and penalty free if investor is qualified.	Distributions may be taken at anytime. Distributions will be treated as ordinary income and may be subjected to early withdrawal penalty if withdrawn while under the age of 59 ½.
Required Minimum Distribution	Owners are not subjected to the RMD rules. However, beneficiaries are subjected to minimum distribution requirements.	IRA owners must begin distributing minimum amounts, beginning April 1 of the year following the year they turn age 70 ½. Beneficiaries are also subjected to minimum distribution requirements.

Be sure to consult with your tax professional, as there are usually other factors that could determine which options are most suitable to meet your financial needs.