IRA Or Roth IRA

Whether you’ve been married two years or 20, it’s imperative that you and your spouse understand the importance of saving now for retirement. According to the 2006 Merrill Lynch New Retirement Survey, men and women often have different plans when it comes to their retirement lifestyle. Because this disconnect can have huge repercussions for a couple's financial strategy, you and your spouse should speak honestly about how you envision retirement, and then talk with a financial advisor about how to arrange your finances in a way that allows you to realize your shared vision.

There are numerous retirement plans to choose from, including the widely known Traditional IRA and Roth IRA. While the two share similarities, they also have significant differences. Just keep in mind that what may be best for one couple may not be best for another.

The Traditional IRA: Save and Invest Now and Pay Taxes Later

With a Traditional IRA, your contributions can be tax deductible if you meet certain criteria. If you don’t qualify, you can still make a nondeductible contribution. Either way, the assets you contribute will enjoy tax-deferred growth potential, which means that you will not pay taxes on any growth or earnings of the assets in your IRA until after you withdraw the money in retirement. In addition, joint accounts are not allowed, however an IRA owner can name his or her spouse as a beneficiary.

Other Traditional IRA characteristics include:

You must be under the age of 70 with earned income to be eligible to open and contribute to a traditional IRA.
Your contributions can be federally tax deductible, if you meet certain criteria
For individuals younger than age 50, the annual contribution limit is $4,000 through 2007. It increases to $5,000 in 2008.
For individuals age 50 and older, the annual contribution limit is $5,000 through 2007. It increases to $6,000 in 2008.
You can withdraw money from your IRA at any time, however you are required to start withdrawing a minimum amount each year beginning no later than April 1 of the year after the year you reach age 70.
Distributions from your IRA are generally taxed as ordinary income. Prior to reaching age 59 any distribution that you take will also be subject to a 10 percent penalty tax, unless an exception applies.

A Roth IRA: Pay Taxes Now and Save and Invest Later

With a Roth IRA, only nondeductible (i.e. after tax) contributions are permitted; however, as with a traditional IRA, your assets will enjoy tax-deferred growth potential. Distributions from a Roth IRA do not face federal taxes if the account has been funded for five or more years and the account owner is at least age 59 or another exception applies. Distributions that aren’t qualified are subject to ordinary income tax and a 10 percent penalty tax.

There are no joint Roth IRAs. Whether or not you can contribute to a Roth IRA, as well as how much you are able to contribute (up to the allowable limits) is determined by you and your spouse’s Modified Adjusted Gross Income (MAGI) and tax filing status. If you file jointly and your MAGI is less than $150,000 you can make a full contribution. If your MAGI is between $150,000 and $160,000, and you are filing jointly you can make partial contribution. If your MAGI is $160,000 or more you are not eligible to make a Roth IRA contribution that year.

Other Roth IRA requirements include:

Contributions to a Roth IRA are not deductible from your federal income tax.
Contribution limits are the same as those for Traditional IRAs.
Unlike the Traditional IRA, you are not required to begin withdrawing assets at age 70. You are also able to contribute to a Roth IRA at any age (even after age 70) as long as you still have earned income and meet the income limitations.

Finding the Right IRA for the Long Haul

When choosing an IRA you should consider you and your spouse’s ages, incomes and life plans. You should also speak with your tax advisor before making a decision. Your financial advisor can also help both of you identify an IRA to help you achieve your retirement goals.

Alan Fonner is a Director at the Fort Worth complex of Merrill Lynch. Alan can be reached at 817-877-9610 or at alan_fonner@ml.com.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

Moving Forward From A Painful Past Your body is a living record of your past—both good and bad—and in order to move forward you must transform.

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