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 c
ontributions 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accumulated interest, dividends, and capital gains on a traditional IRA are tax-deferred until the money is withdrawn.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.