Now that you've found someone to grow old with, it's time to start saving for those golden years. You can save for retirement through work or you can do it on your own using savings or an individual retirement account. Personal IRAs come in two flavors, the original, called the "traditional" IRA and the Roth. The money deposited in a traditional IRA is tax-deductible and lowers that year's taxable income. Roth savings are not taxed when you remove the money at retirement.
No matter which IRA you use, Roth or traditional, there's a contribution limit. You can contribute the maximum if neither you nor your spouse has an employer-sponsored plan. For 2010, each person can deposit -- and deduct -- up to $5,000, so long as they have earned income of at least that amount. That number increases to $6,000 if the person is over the age of 50. That's up to $10,000 a year for a couple under 50.
Traditional IRA Income Limits
If you or a spouse have the option of an employer-sponsored retirement plan, you still might be able to use a traditional IRA. The income limits vary depending on filing status. For a traditional IRA, your income must be below $55,000 for a full $5,000 deduction ($6,000 over 50) if you're single. If you make more you can still contribute, but the allowable amount decreases after $55,000 and ends at $65,000. Married-filing-jointly couples have similar rules, but the full-contribution limit ($5,000 each, $6,000 for those over 50) ends at $89,000 and phases out at $109,000 if you both had a retirement plan. If one spouse has a retirement plan but the other doesn’t, the spouse with no plan can contribute the full amount if their combined income is below $166,000. The amount phases out at $176,000.
Roth Income Limits
If you' have a retirement plan at work, but want a separate IRA, you have higher income limits on a Roth. For single filers, the income restrictions on participation begin at $105,000 and contribution limits phase out at $120,000. Married-filing-jointly taxpayers can contribute the full amount to a Roth until their income reaches $166,000, phasing out completely at $176,000. There are no income requirements if you have no retirement plan at work.
The tax laws on the traditional IRAs require you to begin taking money from the IRA when you reach 70 1/2-years old. You pay taxes on the full amount, which is logical since you received a tax deduction on the deposit. However, the Roth has no required minimum distribution and there's no tax when you take out the funds, since you paid taxes on your contributions as part of your income at the time they were made.
When to Use a Roth
If you're in a low income tax bracket, a Roth is better because you don't reap that much benefit from the tax deduction on contributions. The younger you are, the more you'll earn on the funds in the account, which makes the Roth IRA a better choice. You can remove the principal without taxation or penalty if you need emergency funds, which makes a Roth a good way to go if you think you might take the money. If your income is below the Roth limits but above the traditional limits, and you have an employer plan, your only option is a Roth.
When to Use a Traditional IRA
If you don't have any retirement plan, using a traditional IRA can help you ease the tax burden and Uncle Sam pays some of that money when you consider the tax relief you receive. An older person nearing retirement often benefits more from the tax break of the traditional IRA than the tax-free status of the growth in the Roth.