In one of their current on-line brochures at irs.com, the IRS says, "An IRA is essentially a 'no fuss, no mess' situation." That may have been true ten years ago, but Congress has added so many new twists and turns to IRA's that nowadays there is a lot of fuss over the messy task of trying to understand IRA's. If Congress really wants to help, in this author's opinion, it would reduce the tax rates and simply the tax code. Congress wants to control, not help.

The purpose of this paper is to go back to the basics and describe the traditional IRA and only one of the new IRA's. The new one is the Roth IRA.

Let's start with what tax preparer's told taxpayers about an IRA's fifteen years ago when there was only one type of IRA:

1. In 2004, you may put up to $3,000 in your IRA as long as you have earnings of $3,000 or more.
2. You may put money in a traditional IRA for year 2004 anytime from January 1, 2004 through April 15, 2005.
3. EXAMPLE: You could go in a bank on January 13, 2005, open your first traditional IRA, put $3,000 in for 2004 and two minutes later put $3,000 in for 2005.
4. You may also put $3,000 into your spouse's IRA or the spouse may put his or her own $3,000 into an IRA.
5. You can deduct the amount yo put into the IRA's directly from taxable income.
6. Years later when you take the money and all the accumulated interest out, you pay tax on it then.
   1. Maybe you will be in a smaller tax bracket when you start drawing out your IRA.
   2. But if not, at least you put off paying the tax for many years.
7. But if either you or your spouse is covered by an employer plan, then you may not deduct the IRA if your gross income is over $75,000 ($55,000 if Single or Head of Household).
8. You can go to any bank and open an IRA.

There are other "options," but these listed facts are the ones that give you enough information to make a rational decision about whether, when, and how much to put into a traditional IRA.

Now, let's go to the now famous Roth IRA.

1. Start off with the above rules.
2. HOwever, a Roth IRA is not deductible.
3. So, why would someone put money into a non-deductible Roth IRA?
4. By not deducting the IRA contribution, later upon retirement, the amount of the contributions taken out are not taxable. But neither is the accumulated interest. This might be a large amount of non-taxable income.

So, which one is better?

The Roth IRA is better.

Some advisors may argue, but the purpose of this paper is give a simple answer.

Copyright © - 2004 Dutch Hawkins Mandeville, LA USA - All Rights Reserved

October 24, 2004