There’s never a bad time to begin or boost your retirement savings, but tax season is a particularly good time to consider your IRA options.

What are the choices?

A traditional IRA allows you to make contributions for immediate tax savings. The earnings of the IRA grow tax-deferred until you begin making withdrawals in retirement. The amount of your contribution which you are able to deduct from taxable income may depend on participation in an employer 401(k) and income level.

A Roth IRA doesn’t give you the immediate tax savings,  but withdrawals are tax-free in retirement. There are income limitations that determine who can contribute and how much; consult with a tax advisor for information on eligibility.

Who is eligible to invest?

Anyone under age 70 ½ who is still earning an income can invest in a traditional IRA. For both types of IRA, if you’re under 50, you can invest up to $5,000 a year; those 50 and over can invest up to $6,000, depending on your Adjusted Gross Income (AGI).

Which IRA is better?

Which IRA you choose depends on your needs. Here are some questions that may help you determine which IRA will work better for you:

• Is your first priority to reduce your taxable income for 2009? A traditional IRA may reduce your taxable income when you make your contributions.
• Are you in a stronger position to take the tax hit now than you will be in retirement? The earnings of a Roth IRA are tax-free rather than tax-deferred like a traditional IRA; you pay the tax now rather than later.
• Does participation in your employer 401(k) plan plus your income make you ineligible for the tax benefit of a traditional IRA? You can still enjoy the tax-free, qualified withdrawals from a Roth IRA down the road.
• Are you concerned about the tax burden on your heirs? Roth IRAs don’t require minimum distributions after age 70 1/2, so your earnings continue to grow, and your heirs will be able to take out that money without paying income tax.

Some experts predict that Americans will need as much as 85% of our working income in retirement. That requires a great deal of careful thought and prudent investing. But it’s never too early or too late to begin, so consult with a financial expert to determine your goals and begin working toward a secure retirement. For more information on retirement plans and IRAs, you can visit the IRS.gov website.

Filed under: Ask GHCU, Financial News and You, Money management tips by Shannon