Money Management: Which IRA Is Right For You?

3/24/2008

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Investing via an IRA (Individual Retirement Account) is smart money management — what’s not to like about putting your money in an account where it can grow tax deferred or even tax free? It’s one of the best examples of the second of Mint’s Three Principles of Personal Finance — make your money work hard for you.

If you haven’t opened an IRA yet, do it now. The deadline is April 15^th! By opening an IRA, you could save up to $1,200 on your 2007 taxes. A $4,000 contribution this year could grow to as much as $65,000 in 35 years.

While there are several flavors of IRAs, the most common choices are the Traditional and the Roth IRA. How do you know which one is right for you? First, understand the differences:

Traditional IRA

Your contributions may be tax-deductible.
Your earnings are tax deferred. Your IRA savings will grow tax free until you withdraw this money after 59 ¹/₂.
Distributions begin at 70 ¹/₂ and are taxed at withdrawal.
Early withdrawals will be taxed and subject to a 10% penalty, except under qualified circumstances.
You can no longer contribute after 70 ¹/₂.

Roth IRA

Your contributions are not tax deductible and are made with “after tax” dollars.
Your earnings grow tax free. Money you withdraw is not taxed if your Roth IRA is open for at least five tax years and you are past 59 ¹/₂.
Your contributions can be withdrawn at any time without penalty.
Qualified distributions are tax and penalty-free.
No age limits on contributions.

Roth and Traditional IRA have similar caps on the maximum dollar amount you can contribute each year. The following table shows the normal annual contribution limits and the catch up limits for those 50 or older.

Traditional and Roth IRA Annual Contribution Limits

Year	Normal	Catch-up
2001	$2,000	$0
2002	$3,000	$500
2003	$3,000	$500
2004	$3,000	$500
2005	$4,000	$500
2006	$4,000	$1,000
2007	$4,000	$1,000
2008	$5,000	$1,000
2009+	Indexed*	$1,000
*Normal contribution limits will increase annually by $500 whenever cumulative inflation exceeds the next higher $500 increment.

Source: Fool.com

Note: These contribution limits are for individuals. Eligible households can effectively double the amount contributed.

These basic IRA comparisons give you an understanding of what’s available, but you’ll need to also factor in your age, income, tax filing status and tax bracket to determine which IRA is right for you. Mint.com has created IRA Advisor, a tool that steps you through this decision making process and helps you pick out a brokerage institution that can manage your IRA based on the following criteria:

No IRA account fees
The number of investment options available
The number of no-load funds available.

Note: A no-load fund is a mutual fund that does not charge front end or deferred sales fees or commissions when you invest in that fund.

Once you’ve determined which type of IRA to open, you’ll want to evaluate your money management and investment options in consultation with your brokerage institution via the money tools available on their web site. Take these steps and you’ll be on your way to maximizing your savings!

Mint asks: Have you opened and funded your IRA this year? What steps did you take to get that done early?

3/24/2008