An Individual Retirement Account (known as the IRA) is a way to start saving for retirement that comes with some tax advantages. You have until April 17,2012 to contribute to a 2011 IRA and still have the ability to deduct the contributions on your 2011 tax return if you qualify.
The Traditional IRA and Roth IRA are two different types of individual retirement accounts with different qualifications and benefits. With a Traditional IRA contributions can be tax-deductible and you pay tax at the back end, which means when you withdraw the money in retirement. With a Roth IRA you pay taxes on your contributions and then distributions are tax-free.
For a Roth IRA for 2011, the amount you can contribute can be limited or reduced to zero if you are single and have a modified adjusted gross income between $107,000 and $122,000 or are married filing jointly and household income is between $169,000 and $179,000. If you are under age 50 and under the gross income limits, you can contribute $5,000 to your Roth IRA in 2011. You can withdraw your contributions to a Roth IRA at any time but any withdrawal of the earnings before you reach age 59 1/2 will result in tax and may result in a 10% early-withdrawal penalty.
For a Traditional IRA for 2011, the amount you can deduct as contributions may be limited if you are covered by a retirement plan at work and are single with a modified adjusted gross income between $56,000 and $66,000 or are married filing jointly with a household income between $90,000 and $110,000 (However, if you are covered by a company plan but your spouse is not, then the deduction is phased out between $173,000 and $183,000). If you are under age 50, you can contribute $5,000 to your Traditional IRA in 2011. Withdrawals can be taken after age 59 1/2 without penalty and must be taken by age 70 1/2 in order to avoid penalties.
If you qualify for both types of IRAs, you will need to make a determination of which one is better for you. This type of analysis would include estimating the amount of earnings you expect to make in the IRA and what tax rates you will be subject to when you make withdrawals to determine which would result in the payment of less tax.