I have been reading this message board for quite a while now. I learned a lot from everybodies questions and contributions, but I am still confused about my IRA options. I would qualify for a traditional IRA this year but next year I will only qualify for a roth IRA. Would there be any benefit to opening a traditional IRA knowing that I will only contribute for one or two years?Any foolish enlightment will be appreciated!pcfarmer
Greetings, Pcfarmer, and welcome. You asked:<<I have been reading this message board for quite a while now. I learned a lot from everybodies questions and contributions, but I am still confused about my IRA options. I would qualify for a traditional IRA this year but next year I will only qualify for a roth IRA. Would there be any benefit to opening a traditional IRA knowing that I will only contribute for one or two years?>>I assume from your confused wording that you mean this year you still qualify for a deductible traditional IRA, but next year your income will be too high so that you will qualify only for a nondeductible IRA. That's because as long as you have earned compensation, you always can have a traditional IRA. For a complete description of the various types of IRA and their associated Adjusted Gross Income limits, see my Foolish Retirement Plan Primer. You can read that missive at http://www.fool.com/retirement .A contribution to a Roth IRA results in the ultimate tax-free distribution of all proceeds. A deductible IRA will be taxed at ordinary rates in effect when distributions begin. If your tax rate remains the same between now and then, then using the same investment in both will result in exactly the same net distribution. If your tax rate falls at distribution, the traditional is better. If your tax rate increases at distribution, the Roth is better. Therefore, run the numbers based on what you think will happen to your rates between now and the time you retire. Also, you may want to look at some analyses I did on this board at http://boards.fool.com/Registered/Message.asp?id=1040013000441002&sort=postdate . They may provide further food for thought as you decide.Me? I'd go with the Roth for annual nondeductible contributions for sure.Regards….Pixy
There are income limits for a deductable IRA.There are income limits for a nondeductable Roth IRA.There are no income limits for a nondeductable regular IRA. Anyone who has earnings of at least the invested amount can get one any year.So, get a deductable if you qualify, or get a Roth if you qualify. If you have too much income for these two options, get a regular nondeductable IRA. But get an IRA every year!The time may come in future years when you can convert either the deductable or nondeductable regular IRA's to Roth, if you then qualify on income grounds.The beauty is, if you have a deductable, all your money can be working for you until you have to withdraw.If you have a nondeductable, either regular or Roth, your basis has already been taxed, so you would have a partial tax break on conversion to a Roth in the future.
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