LANDLINE

November 2006

ROTH & TRADITIONAL IRAs

One of the most common questions asked is whether to contribute to a traditional or Roth

IRA. A traditional IRA provides a deduction on contributions, but distributions from it are taxable as ordinary income. A Roth IRA provides no deduction on contributions, but distributions after retirement age can be totally tax free.

With the traditional IRA, you can contribute the maximum allowable amount each year into a plan for you and your non-working spouse and, of course, for your working spouse. Money you set aside for your traditional IRA contribution is an income tax deduction. By making an IRA contribution, you get a tax deduction for the amount that you contribute. The contribution goes into an IRA account whose earnings are compounded tax-free until you start taking money out upon retirement. Since your IRA contribution resulted in a tax deduction, in later years, when making qualified withdrawals from the plan, those withdrawals will be taxed.

Contribution to a Roth IRA allows you to put away a maximum allowable contribution each year into the plan, but that money is not deductible. However, in later years when you make qualified withdrawals form the plan, those withdrawals are tax-free. In other words, when you begin withdrawals or take a lump sum payment from a regular IRA, you must pay ordinary income taxes on the money. But when you take lump sum or periodic payments from a Roth IRA, they are tax free including the money earned over the years.

Your future tax bracket can make either IRA more attractive than the other. If you are in a higher tax bracket now than when you plan to start withdrawals, a traditional IRA would make sense. The opposite is true for a Roth IRA. If you are in a lower bracket now and will be in a higher one when withdrawals are made, choose the Roth IRA.

How do you predict this? If your earnings now are higher than you expect during your retirement years, then the traditional IRA makes sense. Additionally, today’s tax brackets are at historic lows, especially for higher earners. With massive budget deficits projected in the future due to Medicare and Social Security costs, tax bracket rates may well go up in the future, to the detriment of holders of traditional IRAs.

There are other considerations. With the traditional IRA, when one reaches 70 ½, annual distributions become mandatory. There are no minimum distribution requirements for the Roth.

Age also becomes a factor. Our feeling is the younger you are, lean toward the Roth, but again, it’s difficult to predict the future.

Another factor to consider is early withdrawals. Unfortunately, people may need their money before they ever intended. We see it for truckers wanting to buy equipment, expand or enter the trucking business. The price is high. If you withdraw all or part from your traditional IRA, you will be subject to income tax plus a 10% penalty. Your State may have similar rules. However, contributions made to a Roth IRA can be withdrawn at any time tax free and without penalty – only earnings on contributions are subject to penalty if withdrawn prematurely. Therefore, a Roth IRA can serve as a tax-free source of funds at any time before retirement if necessary.

When a traditional IRA is converted to a Roth IRA, the converted amount can be withdrawn without penalty after five years, but there are taxes to be paid upon conversion.

Seek advice and do your planning. Choosing the correct IRA for your situation is not an easy task.

While we are on the subject of retirement, we came across an estate planning checklist that might be useful.

Ø Review your assets and debts

Ø Decide whom you want to inherit your assets

Ø Draft or update your will

Ø Choose an executor

Ø If you have dependent children, choose a guardian

Ø Get a durable power of attorney

Ø Draft a living will

Ø Obtain medical power of attorney

Ø Consider whether you need a trust for your assets

Ø Discuss an estate plan with your heirs

Ø Write a letter of instruction

This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. Contributions to this article were made by Shasta May, Director Business Development for PBS. If you would like further information, please contact us at (800) 697-5153. Visit our Web Site at www.pbstax.com.

“Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.”