Individual Retirement Accounts (IRAs)

Traditional IRAs

Traditional IRAs remain an attractive option for retirement savings. For tax year 2009, you may contribute up to $5,000 to an IRA or combination of IRAs. This limit will be subject to inflation indexing in future years. Additional annual catch-up contributions of up to $1,000 are allowed for taxpayers age 50 and older.

Contributions to traditional IRAs may be tax deductible, and earnings grow on a tax-deferred basis. Deductions phase out for active participants in an employer-sponsored plan. To see if the phaseouts affect you, click here.

A nonparticipant spouse may also make a deductible IRA contribution, as long as the couple's AGI is less than $176,000. And, couples with a nonworking spouse can make a combined deductible contribution of up to $10,000 (plus catch-up, if applicable).

Distributions, which must start at age 70½, are subject to income tax. Furthermore, withdrawals made before the age of 59½ may be subject to a 10% federal income tax penalty. Certain exceptions may apply.

You can fund up to $10,000 of a first home purchase or pay for qualified higher education expenses from your IRA without being subject to an early penalty.

Roth IRAs

Roth IRAs also continue to be popular. Contributions to a Roth IRA are not tax deductible, but distributions from the account are tax free, provided you have reached the age of 59½ and have owned the account for five years. The allowable contribution to a Roth IRA is subject to phaseout rules. To see if your income level falls within the phaseout range, click here.

The contribution limits that apply to traditional IRAs also apply in full to Roth IRAs.

You may convert an existing IRA to a Roth IRA as long as your AGI is below $100,000 in the year of conversion. The Tax Increase Prevention and Reconciliation Act of 2005 eliminates this income restriction beginning in 2010. Conversions are treated as distributions for income tax purposes. Therefore, they will be subject to income tax, but you will not be penalized for early withdrawal.

Amounts rolled over or converted into a Roth IRA and then withdrawn within 5 years face a 10% early withdrawal tax.

Which IRA Is Best for You?

If you're fairly young, expect to be in a similar tax bracket when you retire, or are concerned about cash flow during retirement, the Roth IRA may be an appropriate choice. If you're older and expect to be in a lower tax bracket, you may be a candidate for a deductible IRA.

Keep in mind, however, that a number of factors should be considered when choosing an investment vehicle. We can help you calculate which retirement savings strategies are right for you. For a side-by-side comparison of the traditional and Roth IRAs, click here.

Whichever IRA you choose, start making contributions now, and continue making them each year. Doing so will allow you to take full advantage of the tax benefits.

Traditional IRAs and other qualified retirement plans are subject to required minimum distributions (RMDs) once you turn age 70½. Consult with your tax advisor to learn more. The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) suspends the rules governing 2009 RMDs from certain qualified retirement accounts.