the facts (and my opinion) behind IRAs

An IRA, which stands for individual retirement arrangement, is a personal savings plan which allows you to set aside money for retirement (IRS Topic 451). The two main types of IRAs are traditional and Roth. But before I begin describing them, let me give you the details about both:

• must have "earned income" to contribute to either. If you're sole occupation is, for example, a landlord and physically don't earn the income, you cannot contribute. Or if all you do is sit and collect dividend or interest income, that doesn't count either. Sorry folks.
• The contribution limite for 2005 is: $4,000. If you're aged 50 and over (before 2006), your contribution amount is $4,500.
• Both have income limitations, as in if you earn too much money, it disqualifies you to contribute, although you're strongly urged to seek retirement savings elsewhere.
• If you withdraw money out of your IRA, BEFORE you turn 59 1/2, you may be subject to an additional 10% tax.
• Each year's contribution is due when that year's income taxes are due. So for your 2005 contribution, you have to make it before April 17, 2006. (April 15th falls on a Saturday this year)
• You can make your IRA contributions with brokerages, banks, and insurance agencies. It all depends on your needs.

So here's the difference between the two.

Traditional IRA - there is one main difference between the traditional and the Roth. Tax. With a traditional IRA, the contribution amount acts as a deduction of your income, so you'll pay less taxes this year. BUT! Whenever you withdraw your money (after age 59 1/2), you'll be taxed for the full accumulated amount. Think about the years of compound interest building on an ever increasing principle. Sure, you can save a few bucks on taxes now, but you could be paying out the wazoo for it later. So unless you have to contribute to a traditional (for income limitation purposes), you probably shouldn't. Very short sighted...

Roth IRA - Unlike the traditional where your current year's income taxes are lower, with a Roth IRA, there is no effect to your income taxes whatsoever. Since you're not deducting your contribution amount from your income, your income stays the same and your taxes stay the same (as if you made no contribution at all). BUT! When you do decide to withdraw your money out, it is completely tax free.

Whatever you decide is fine with me. Some people need the larger deduction this year - or the refund. But if you're thinking for the long term, the Roth is definitely the better way to go.