If you want to contribute to a tax-advantaged retirement account that's outside your employer's plan, you have two main choices: the traditional Individual Retirement Account (IRA) and the Roth IRA.

These two IRAs differ in their provisions for deducting contributions and making withdrawals. With a traditional IRA, you're allowed to deduct current contributions from your income (subject to certain income limits if you also have an employer's plan). So today's income tax bill is reduced. With a Roth IRA, contributions aren't tax-deductible, but are made with after-tax dollars. Earnings on a traditional IRA account will be taxed when the money is withdrawn. With a Roth IRA, you're allowed to withdraw both contributions and earnings tax-free if you meet certain requirements.

The choice of which retirement account to use is not a one-size-fits-all proposition. If you assume you'll be in a higher tax bracket during retirement, nontaxable Roth withdrawals look pretty good. Some experts argue that Congress will almost certainly raise future tax rates to pay for a variety of government expenses, from economic stimulus programs to health care for baby boomers. If that happens, you may be glad you contributed to a Roth IRA because withdrawals aren't subject to taxes. Others note, however, that higher tax rates are by no means certain. Even if higher rates are enacted into law, they argue, most people will not generate enough income in retirement to see much effect on their tax bill. These experts prefer traditional IRAs, which put more money in your pocket today.

A Roth IRA is often seen as a good fit for younger workers. They're in lower tax brackets now, but may expect higher income in retirement. On the other hand, if you're approaching the peak earnings years (often ages 50 to 65), your income is more likely to diminish in retirement. Because a lower income generally means fewer taxes, the advantage of tax-free withdrawals becomes less important for older workers.

Also, the tax-deferral benefits of a traditional IRA may allow savers to lay aside more money today. For example, because of taxes you may have to earn $8,000 to put $5,000 into a Roth IRA. With a traditional IRA you may be able to sock away more money now, which could lead to a bigger pot of money in retirement.

Fortunately, it's not an all-or-nothing decision — you can contribute to a variety of retirement accounts. If you'd like help with your retirement planning, give us a call.

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