How can I determine which IRA is best for me?

People often wonder what type of IRA is best. Both the Traditional
and Roth IRAs have significant tax advantages, but in some situations
one may be better than the other. Since we can't predict what taxes
will be like 20 years from now, if you have the ability to contribute
to both types of IRAs, that might be a good idea. By diversifying your
tax liabilities, you can be prepared for any significant changes in tax
rates by the time you reach retirement.

Answer:

Traditional IRA

The benefit of a Traditional IRA
is that the contributions you make can be tax-deductible in the year
that you make the contribution. That means if you make a $4,000
contribution into a Traditional IRA this year, you can reduce your
current taxable income by $4,000. For individuals who are in a higher
tax bracket, this can be a reasonable savings.

Since the contributions are done on a pre-tax basis, that means you
will be taxed in the future when you withdraw money from the IRA. This
money is then taxed as ordinary income. If you expect to be in a lower
tax bracket when you retire, this means you see the greatest tax
benefits from a Traditional IRA. Keep in mind that you must begin
taking required minimum distributions at age 70 ½.

Roth IRA

You can think of a Roth IRA as the opposite of a Traditional IRA in
terms of taxation. With a Roth IRA, your contributions are made on an
after-tax basis, which means there is no current tax benefit to you
when you make a contribution. Unlike a Traditional IRA, you can make
qualified distributions from the Roth IRA tax free. This typically
benefits those who expect to be in a higher tax bracket upon retirement.

Additionally, Roth IRAs do not require that you take required
distributions upon reaching age 70 ½. This can be increasingly
important as people are living and working longer. Also keep in mind
that there are income limitations that may prohibit higher income
individuals to participate in a Roth. These income limits are slated to
be lifted in the year 2010.