Traditional IRAs and Roth IRAs have similarities and differences. Some people may wonder which account type is better, but no answer applies universally. Which account to use depends on the personal financial situation and goals of the individual. People who are considering using an IRA should evaluate the features of each so they can determine which account works best for them. A comparison of the main features of Traditional IRAs and Roth IRAs is shown below. All rules and limits shown here apply to the 2010 tax year. Some amounts are adjusted annually for inflation and may be different in future tax years. Please refer to IRS Publication 590 for additional information regarding IRAs. Traditional IRA Compensation Eligibility: you or your spouse must have taxable compensation during the year Income Limit Eligibility: no limit Age Limit Eligibility: must be under age 70 & 1/2 Contribution Timing: between January 1st and tax return deadline, usually April 15th of following year Contribution Tax Status: before-tax (tax-deductible) Contribution Deductibility if Covered by an Employer Retirement Plan: fully deductible if modified adjusted gross income is less than $56,000 if single or head of household and less than $89,000 if married or qualifying widow(er) Annual Contribution Limit: the lesser of $5,000 ($6,000 if age 50 or older) or 100% of taxable compensation Excess Contributions: 6% penalty tax on amounts not withdrawn before the tax return due date Earnings/Growth Tax Status: tax-deferred (not taxed until withdrawn) Required Holding Period: no minimum before withdrawal Distribution Tax Status: taxed at ordinary income tax rates Early Distributions: withdrawals before age 59 & 1/2 taxed at ordinary income tax rates plus 10% penalty tax Required Minimum Distributions: must begin withdrawals before age 70 & 1/2 Insufficient Distributions: 50% excise tax on amounts not withdrawn as required Conversion Between Accounts: any amount can be converted to a Roth IRA, but ordinary income taxes are due on tax-deferred money converted Roth IRA Compensation Eligibility: you or your spouse must have taxable compensation during the year Income Eligibility: contribution limit begins to phase out if modified adjusted gross income is more than $105,000 if single or head of household and more than $167,000 if married filing jointly or qualifying widow(er) Age Limit Eligibility: no limit Contribution Timing: between January 1st and tax return deadline, usually April 15th of following year Contribution Tax Status: after-tax (non-deductible) Contribution Deductibility if Covered by an Employer Retirement Plan: not applicable Annual Contribution Limit: the lesser of $5,000 ($6,000 if age 50 or older) or 100% of taxable compensation Excess Contributions: 6% penalty tax on amounts not withdrawn before the tax return due date Earnings/Growth Tax Status: tax-exempt (not taxable if withdrawn after age 59 & 1/2) Required Holding Period: minimum 5 years before first qualified distribution Distribution Tax Status: tax-exempt (both basis and earnings) Early Distributions: withdrawals of basis are not taxable, but 10% penalty tax applies to withdrawals of earnings Required Minimum Distributions: never required during lifetime Insufficient Distributions: not applicable Conversion Between Accounts: the current year’s contributions to a Roth IRA can be recharacterized as contributions to a Traditional IRA *FMP Wealth Advisers does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. **To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. ***These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.