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How can I save a million dollars?

Every day is an opportunity to teach kids about money management

May 6, 2011:
IRAs

Last week we talked about saving for retirement and how IRAs—individual retirement accounts—are a good tool to consider in the overall scope of your savings plan. That generated some questions from viewers so today we’re giving you more information specific to IRAs.

WHAT IS AN IRA?
IRAs are retirement accounts with tax advantages. There are two types of IRAs: a traditional IRA and a Roth IRA.

The big question is when to choose a Traditional vs. Roth. Both are great ways to save for retirement, although each offers different advantages. There are lots of factors to consider when making your choice and I recommend consulting your tax advisor or an investment professional because they’re your best source of information. There are some basic facts that can assist you learning more about this powerful retirement saving tool:

HOW MUCH CAN YOU CONTRIBUTE?
Regardless of which you choose...

As long as you earn money, you can make contributions to an IRA. But there are annual maximum amounts. For 2011 it’s:
- Under age 50 $5,000/year
- Age 50 and older $6,000/year And If you’re in this age range you may make additional “catch up” contributions.
The limits noted above can be split between a Traditional and a Roth but the combined limit is set. Also, it may be less depending on your income so be sure to research this more.

WHICH IRA IS RIGHT FOR YOU?
Again, this is a personal decision best made in concert with a banker or financial planning professional. A few of the basic elements that are good to understand going into that conversation are:

	Traditional IRA	Roth IRA
Tax deduction for funding the account?	Yes, if income eligibility requirements met.	No.
Required minimum distributions?	Yes, by age 70 ½.	No.
Earnings	Taxed at withdrawal.	Not taxed.
Availability	Available to everyone; no income restrictions	Available to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually.

»TIP: If just one spouse works outside the home there is an exception that allows Roth accounts for nonworking spouses. If you and your spouse file a joint return but one does not work, the employed spouse can open and contribute to a Roth IRA for the unemployed partner.

WHERE CAN YOU GET AN IRA?
IRAs of both types can be opened through a bank or brokerage house. There are a lot of details about IRAs so talk to an expert or go to our website for more details and suggestions on other online resources you can trust.

GET MORE INFORMATION

Not sure if a Roth IRA or Traditional IRA is best for your situation?
- A great Traditional IRA vs. Roth IRA comparison from BankRate.com
- What's the difference between Roth and traditional IRAs? from Money.com
If you have a Traditional IRA, but want to know if it makes sense for you to convert it to a Roth IRA, use this simple calculator
You can also find out if contributing to a Traditional IRA is a good match for your retirement savings mix. Try this calculator

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