Roth IRA vs. Traditional IRA

You can compare the features between Roth and Traditional IRAs below.

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For Coverdell ESA information
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Comparing the Roth and Traditional IRAs:

	Traditional IRA	Roth IRA
Who can contribute?	Anyone with earned income to age 70½	Anyone with earned income at ANY AGE, subject to maximum income limitations
How much can each individual contribute?	To $5,000 of earned income each year	To $5,000 of earned income each year
Individuals age 50 or older:	An additional $1,000 if you are 50 or older by the end of the year	An additional $1,000 if you are 50 or older by the end of the year
Tax-Deferred Growth?	Yes	Yes
Use with most any type investment?	Yes	Yes
Taxable Distributions after age 59½?	Yes	No - not if later than 5 years after the account is opened
Tax-Free Withdrawals?	No	Yes - after age 59½ and is 5 years after the account is opened
10% Penalty on Withdrawals?	Prior to age 59½	Prior to age 59½ or within the 1st 5 years the account is opened and only on the earnings in excess of total contributions
Mandatory Withdrawals Start at:	age 70½	NEVER unless certain exceptions apply
Can children inherit the account Income-Tax Free?	No - must pay income tax	YES
Use for Higher Education Penalty-Free?	Yes - but will pay appropriate income tax on the distribution	Yes - but will pay appropriate income tax on the distribution prior to age 59½
Use for First Time Home Purchase Penalty-Free (anyone who hasn't owned a home in the past 2 years)?	Yes - up to $10,000 - must pay appropriate income tax on the distribution	Yes - up to $10,000 - must pay appropriate income tax on the distribution prior to age 59½
In general, are qualified distributions considered as part of one's Adjusted Gross Income? Can this reduce one's Social Security?	Yes / Yes	No! / No!
Tax-Deductible Contributions?	Yes, but only: When not participating in a qualified plan with employer, or, when participating in qualified employer plan and BELOW CERTAIN INCOMES (see chart below)	No A Roth IRA is ALWAYS non-deductable

Little known Factoid: For each dollar you contribute to any other type of IRA, you must reduce your maximum contribution limit to your Roth IRA by that amount!!

Deductibility Phase-Out Increases for Traditional IRAs (when participating in an employer's qualified plan)
Tax Year	Single Filers	Joint Filers
1999	$31,000 to $41,000	$51,000 to $61,000
2000	$32,000 to $42,000	$52,000 to $62,000
2001	$33,000 to $43,000	$53,000 to $63,000
2002	$34,000 to $44,000	$54,000 to $64,000
2003	$40,000 to $50,000	$60,000 to $70,000
2004	$45,000 to $55,000	$65,000 to $75,000
2005	$50,000 to $60,000	$70,000 to $80,000
2006	$50,000 to $60,000	$75,000 to $85,000
2007	$50,000 to $60,000	$80,000 to $90,000
2008	$53,000 to $63,000	$85,000 to $105,000

For 2008 You are Eligible to Participate in a Roth IRA IF:
you have taxable compensation and your filing status is ...	AND your modified AGI is ...	THEN ...
... married filing jointly or qualifying widow(er)	less than $159,000	you can contribute up to $5,000 ($6,000 if age 50 or older)*
	at least $159,000 reduced as explained under but less than $169,000	the amount you can contribute is reduced as your income increases*
	$169,000 or more	you cannot contribute to a Roth IRA.
...married filing separately AND you lived with your spouse at any time during the year	zero (-0-)	you can contribute up to $5,000 ($6,000 if age 50 or older)*
	more than zero (-0-) but less than $10,000	the amount you can contribute is reduced as your income increases*
	$10,000 or more	you cannot contribute to a Roth IRA.
...Single Head of Household, or Married, filing separately and you did NOT life with your spouse at anytime during the year	less than $101,000	you can contribute up to $5,000 ($6,000 if age 50 or older)*
	at least $95,000 but less than $110,000	the amount you can contribute is reduced as your income increases*
	$116,000 or more	you cannot contribute to a Roth IRA.

*See IRS Publication 590 for a more complete description

Although the above information helps give a better understanding of the differences between Roth and Traditional IRAs, the question of converting from an existing Traditional IRA to a Roth IRA has not been addressed above. Generally, any amounts converted are considered as taxable in the year of conversion, beginning in 1999. The "4 year spread" of the tax burden was only available for conversions made in 1998. If you still wish to spread your tax burden when converting from a Traditional to a Roth IRA, you may convert portions of your Traditional IRA to a Roth IRA, in amounts you are comfortable paying the taxes on each year, until the entire amount is converted to a Roth over a period of years.
For example:
You have $100,000 in a Traditional IRA. But, you are only willing to pay taxes on a maximum of $20,000 in any given year's conversion. You may convert $20,000 (for this example) per year until the account is totally transferred. Or, you could convert any other amount you want to convert. It is entirely up to you as you consider how much of a tax liablility you are willing to incur in any given year. This way, you can avoid the tax burden for the entire conversion happening in any one year. It will simply take you longer to achieve full conversion. However, be wary of the "5-year rule" for conversions. It is our interpretation that each conversion will start a new "5-year rule" for that amount converted.

RollOvers

What if you have recently retired (or plan to in the near future) from a company and you have a sizeable accumulation in a 401k or other qualified retirement plan. You may roll over the entire amount from any qualified plan to a Traditional IRA. To make sure you avoid making this a taxable transaction, consider making this a "direct rollover." This way, your current plan administrator cuts a check directly to the new plan administrator of your IRA, which is a non-taxable event. If you were to receive the funds yourself, your current plan administrator may be obligated to withhold 20% for taxes. So, just avoid the withholding altogether with the "direct rollover!" Once you have your direct rollover completed into a Traditional IRA you may then convert any amounts you deem fit into a Roth IRA. Remember, this conversion will be taxable in the year it takes place. You may not roll directly from a qualified retirement plan, other than a Traditional IRA, to a Roth IRA.

Education IRA

Coverdell ESA
(Education Savings Account)

You may make Non-Deductible contributions of up to $2,000 per year for EACH child under age 18, as long as you are eligible to make contributions (see contribution eligibility requirements, below)
Contributions grow tax-deferred and are distributions are tax free, as long as they are used by the beneficiary for elementary through college education purposes (tuition, books, fees, etc.)
Distributions may NOT be used to pay for expenses to which the federal Hope Grant or Lifetime Learning Credits were applied
If distributions exceed education expenses, the portion of the distribution which represents the investment return will be taxable as ordinary income and an additional 10% penalty will be applied to that amount
The funds must be liquidated for education expenses prior to the beneficiary becoming 30 years of age. Otherwise, the remaining account balances must be distributed within 30 days after becoming age 30 and penalties and fees will apply. These penalties may be avoided by rolling over the balance to another Coverdell ESA account of another family member.
The contributor may make contributions each year, up until the due date of their income tax return, without extensions (typically April 15th of the following year).

Eligibility to Contribute:

You may NOT contribute to a Coverdell ESA if your annual income exceeds:
$220,000 for JOINT FILERS, or
$110,000 for SINGLE FILERS
The $2,000 annual contribution limit is PHASED OUT for annual incomes BETWEEN:
$190,000 to $220,000 for JOINT FILERS, or
$95,000 to $110,000 for SINGLE FILERS

(This page is for information purposes only and is based on our current understanding of the 1997 and subsequent changes to tax law. For tax advice, consult your tax accountant or tax planner. Above comparisons concerning withdrawals or distributions are generally considered as qualified distributions, unless otherwise stated, and may be subject to exceptions. Please understand that U. S. tax code is extensive and there may be exceptions to any statement above, but all statements are believed to be true, in general.)