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Traditional IRAs and Roth IRAs

Posted on 28 December 2008 by Allgen Financial

Definition
A traditional IRA is a personal savings plan that offers tax benefits to encourage retirement savings. Contributions are either deductible or nondeductible. Regardless of whether your contributions are deductible, earnings in a traditional IRA grow tax deferred.

A Roth IRA is another type of personal retirement savings plan. All contributions to a Roth IRA are nondeductible. If certain conditions are met, withdrawals from a Roth IRA, including earnings, are tax free.

Traditional IRAs and Roth IRAs can be used to accumulate funds for college. The 10 percent penalty tax that normally applies to withdrawals from traditional and Roth IRAs before age 59½ does not apply if the money is used to pay the qualified education expenses of you, your spouse, or the children or grandchildren of you or your spouse.

Prerequisites
• You qualify to make contributions to a traditional IRA or Roth IRA
• You, your spouse, or the children or grandchildren of you or your spouse have qualified higher education expenses

Key Strengths
•    Early withdrawal penalty is waived
•    The federal government does not consider the value of your traditional IRA or Roth IRA in determining your child’s financial aid eligibility
Key Tradeoffs
•    Your retirement nest egg is reduced
•    Colleges may consider the value of your traditional IRA and Roth IRA before awarding their own financial aid

Variations from State to State
• States may vary in their tax treatment of traditional IRAs and Roth IRAs
• States vary in their protection of traditional IRAs and Roth IRAs from creditors

How Is It Implemented?
•    Open a traditional IRA or Roth IRA with a bank, financial institution, mutual fund company, life insurance company, or stockbroker
•    Select actual type of investment (e.g., certificate of deposit, mutual fund)
•    Make contributions as desired up to the due date of your federal tax return for that year (usually April 15 of the following year)
Article Written By: Forefield Inc.
Neither Forefield Inc. nor Forefield Advisor provides legal, taxation, or investment advice. All content provided by Forefield is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources.

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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