Choosing Between Roth Iras and Traditional Deductible Iras

Choosing Between Roth IRAs and Traditional Deductible IRAs

The decision is complicated if you're eligible for both types of IRAs. With the creation of the Roth IRA and the liberalized eligibility guidelines for the traditional IRA, the vast majority of individuals are now eligible to make some sort of IRA contribution.

IRA Eligibility

All but the wealthiest of workers are eligible to contribute to a Roth IRA. Eligibility to make the maximum contribution to a Roth is limited to married couples with adjusted gross incomes of less than $150,000 and single individuals with incomes under $95,000. Smaller contributions are allowed for couples with adjusted incomes up to $160,000 and singles with incomes up to $110,000. Roth IRA contributions aren't deductible, but withdrawals are tax-free once the account has been open more than five years and you're over age 59 1/2.

Fewer taxpayers qualify for traditional IRAs, where contributions are deductible, but withdrawals are taxed. But Congress loosened the eligibility requirements to allow many more taxpayers to take advantage of traditional IRAs than in the past.

The Taxpayer Relief Act of 1997 raised the income-eligibility limits for taxpayers who participate in a 401(k) or are covered by some other employer retirement plan. Before the rules were liberalized by the 1997 tax act, a married couple above the income-thresholds could make deductible IRA contributions only if neither spouse was covered by a retirement plan at work.

But this restriction was eased beginning with 1998 returns. If only one spouse is covered by an employer retirement plan, the other spouse will be eligible for at least a partial IRA deduction so long as the couple's joint income is below $160,000.

If neither spouse is covered by an employer retirement plan, then both spouses can make deductible contributions to a