My husband and I are in our early 50s and we want to open IRA accounts outside of our 401(k) plans. We aren’t sure whether to get a traditional IRA or Roth IRA. How are they different?
— K. Parker , Haledon, NJ
The biggest difference between the two types of IRAs is the way the government treats taxes. You can deduct traditional IRA contributions on your income taxes. This means that if you earn $60,000 and contribute $5,000 to an IRA, you will pay taxes on only $55,000 in income to the IRS. But you cannot deduct Roth IRA contributions.
All accumulated interest, dividends, and capital gains on a traditional IRA are tax-deferred until the money is withdrawn. At age 59 1/2 you can begin withdrawing funds, but the money will then be taxed. With a Roth, you can withdraw all your money 100% tax-free at age 59 1/2.
Since you’re both over 50, you can make additional, or “catch-up” IRA contributions. You also can contribute more than the $4,000 limit per year. For tax years 2006 and 2007, those 50 and older can contribute up to $5,000; in 2008, that amount increases to $6,000. Husband and wife can each contribute. For a Roth, the maximum contribution allowed for couples is $150,000 yearly.