A Guide to Individual Retirement Plans

When deciding on the type of individual retirement account that a person would need, he or she should know the difference of the two types of Individual Retirement Accounts (IRAs). In the traditional IRA, the person builds a retirement fund and doesn't pay the taxes on it until the money is withdrawn. The amount invested in the traditional IRA also reduces the person's taxable income.

The second type of IRA is the Roth IRA. The difference between the two lies in the tax advantages of the Roth IRAs and in the persons who may open Roth IRA accounts.

While in the traditional IRAs, only persons below 70 by the end of the calendar year may open an account, a person of any age may open a Roth IRA account. A person is also eligible to open a Roth IRA even if his or her income is below $95,000. However, a person is not eligible if his or her individual income is above $110,000.

A person who makes traditional IRA contributions may do so before the taxes on his or her earnings are computed. This will make a person's taxable income lower. On the other hand, contributions to the Roth IRA should be done after the person has already computed the taxes on his or her earnings.

If the person does not have an employer, the tax benefits of his or her contributions to the traditional IRA are fully deductible. For Roth IRA, these are non-deductible. If a person decides to convert from IRA to Roth IRA, taxes will be applied on the taxable IRA portion during the year of conversion.