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Choosing the Right IRA

Setting aside money for your retirement is a smart thing to do - and tax time is a great time to get started. However choosing which Individual Retirement Account (or IRA), can sometimes be a difficult thing to do. The most popular types of retirement accounts are: Traditional, Roth, and SEP IRA. To qualify for an IRA contribution you must have earned income which is defined as: wages, salaries, tips, commissions, and bonuses but does not include income from dividends, pensions, or annuities. For those selecting a SEP IRA (Simplified Employee Pension IRA), earned income includes net income from self-employment. Below are a few thoughts to keep in mind when choosing your IRA:

Age and Contribution Amount:

For tax year 2012, the maximum IRA contribution for individuals age 49 and under is $5,000. Individuals 50 and over can make an additional "catch up" contribution of $1,000. If you are over age 70½, you are not eligible to contribute to a Traditional IRA, however you can contribute to a Roth IRA or SEP IRA. Your tax-filing status is another factor to consider in determining the amount you are able to contribute to a Roth IRA, or whether you could deduct a Traditional IRA contribution on your taxes.

Required Minimum Distributions:

Those who choose a Traditional IRA or SEP IRA are mandated to make minimum required distributions at age 70 ½. Those who select a Roth IRA do not have a minimum required distribution.

Tax Deductions:

Major differences among Traditional, Roth, or SEP IRAs is the payment of taxes when you take a distribution or withdrawal. With both a Traditional and SEP IRA, your contributions are tax-deductible, and you pay taxes when you take a distribution or withdrawal. With a Roth IRA, your contributions are not tax-deductible, but withdrawals are tax-free (with exceptions). If you believe your tax bracket will be lower in retirement, you should consider taking the tax deduction available now with a Traditional IRA. If, however, you believe that your tax bracket will be higher in retirement, you should avoid future taxation by contributing to a Roth IRA.

As your income increases, your ability to deduct a Traditional IRA contribution or contribute to a Roth IRA may decrease. For example, if you are married filing jointly, your maximum Roth IRA contribution amount begins to decrease (phase out) when your income exceeds $173,000 and is eliminated altogether when your income reaches $183,000.

For more information on Traditional, Rollover & Roth IRAs please visit ManagingMoney.com

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