By: A.J. Cook


Traditional and New Roth IRAs Compared

Congress has flooded us with Individual Retirement Account tax shelters without a road map. Maybe the toughest decision is to choose between the traditional IRA and the new Roth. The problem is the rules are confusing and have no recognizable logic.

Comparing the advantages is easy. The traditional IRA usually gives the taxpayer a deduction for contributions with taxes on withdrawals, whereas a Roth gives no deduction on contributions, but exempts earnings. That's simple enough. But hold on, there's more:

• Eligibility -
  

The first question in making the decision is, are you eligible for both? With a Roth, your adjusted gross income must be less than $95,000 for singles and $150,000 for joint filers for you to qualify for a $2,000 contribution. Whereas with the traditional, if you don't participate in a company retirement plan, or if you do and have income of less than $35,000 for singles and $50,000 for joint filers, you qualify.

If you are eligible for both, choosing between the two depends on your predictions. Will you be in a lower bracket when you pull out the money? Do you plan to sock the money away for a long time? Or do you not know and just want flexibility?

• Lower tax bracket at withdrawal -
  

When taxpayers think they will withdraw while in a lower bracket than at the time of contribution, then a traditional may be better. They will benefit from a high tax rate on a deduction and be subject to a low rate on income. With some, it may be easy to decide, with others impossible. How can you know what your tax bracket will be 25 years from now – or even next year? This can be affected by the loss of your job, a budget crisis in Washington or a depression – who knows.

• Delaying withdrawal for a long time -
  

With both, an early withdrawal may trigger a 10% penalty unless the funds are taken out after age 59½, death or disability, or a need of up to $10,000 to buy a new home. There are other exceptions to the penalty, one of which will be discussed under flexibility. The Roth has the added requirement limiting withdrawals until five years after the first contribution.

When a taxpayer won't need the money for a long time, the Roth wins. This withdrawal delay increases the benefit of the Roth IRA because all earnings during this time are completely tax free. With a traditional, the tax is only postponed, so as its profits increase the amount of tax on withdrawals increases.

• Flexibility -
  

For flexibility on contributions and withdrawals, the Roth wins again.

Mandatory discontinuance of contributions: With a traditional, contributions must stop at age 70 ½. Not so with a Roth; contributions are permitted for life.

Allowed Withdrawals: As mentioned above, there are restrictions on withdrawals. These apply to Roth earnings and traditional earnings and contributions. Not so with Roth contributions; these can be withdrawn at any time without tax or penalty.

Mandatory Withdrawals: A taxpayer must start withdrawing funds from a traditional after age 70½. Not so with a Roth. Funds need not be withdrawn within a lifetime.

The Moral:  To Roth or not - who knows?

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
This information is not intended for use without professional advise.
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Released 3-30-98