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Traditional and Roth Individual Retirement Accounts Compared

Individual Retirement Accounts (IRAs) form a large part of the financial landscape and can help offset taxes, with the additional benefit of contributing to a well-rounded retirement plan or savings for a child's education. You can enjoy the benefits of compounding growth and tax savings, but with several varieties of IRAs available it can get a little confusing. Learning some key components is a good first step to understanding the benefits of these accounts.

Traditional Individual Retirement Account

Traditional IRAs are retirement accounts where contributions may be tax deductible if you are not covered by your employer's retirement plan. If you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a Traditional IRA depending on your income or filing status (consult your tax advisor).

There is no maximum income limit associated with the Traditional IRA.

Individuals may contribute up to $5,500 ($6,500 if age 50 or older) in 2013. The investment grows tax-free until it's withdrawn, usually after age 59½. Money withdrawn before age 59½ will usually result in a 10% tax penalty, but there are some exceptions and additional penalties may vary from institution to institution.

Roth Individual Retirement Account

The most notable thing about a Roth IRA is that withdrawals are tax-free if the account has been open for at least five years and you're at least 59½ when you start to withdraw money. Contributions to a Roth are not tax deductible, however.

Individuals may contribute up to $5,500 ($6,500 if age 50 or older) in 2010. It is important to note that in order to invest in a Roth IRA, your income can not be higher than $112,000 or $178,000 combined if married.

Reminder: Contributions for the 2009 tax year can still be made to IRAs (Traditional and Roth) any time before the April 15 tax deadline, up to the contribution limit for that year.

Please Note:
Contribution limits are based on modified adjusted gross income (AGI). Your limit may vary. Consult IRS Publication 590 or a tax professional for details.
The catch-up contribution is applicable only to the calendar year where the holder turns 50 years of age, not the previous year. Note: For each of the accounts listed above, there are specific criteria to be met in order to qualify for both opening and contributing to the account.
Penalties and early withdrawal fees may vary. Please contact your financial institution for more information.