2010 contribution limits to both IRA accounts is $5k. If you’re over 50 in 2010, then it’s $6k. Click here for the IRS Rules.
IRA
- Enables you to save money for retirement tax free.
- Example – I make $50k and put $2k towards my IRA account. The IRS evaluates my taxes based on income of $48k, not $50k.
- Money withdrawn before 59.5 years of age is subject to early withdrawal penalties.
- When you begin withdrawing your money during retirement your money will be taxed then.
- You and I do not know what tax rates will be in place X number of years into the future.
Roth IRA
- Enables you to save money for retirement on money that has already been taxed.
- If you make$50k this year and save $2k to your Roth IRA, the IRS still looks at your income as $50k.
- Since your contributions have already been taxed, you can withdraw your principle (initial investment amount) without penalty prior to retirement.
- All earnings will be penalized, if withdrawn prior to age 59.5.
- To qualify for tax free distributions, you must be over 59.5 and your contributions must have been in the Roth IRA account for at least 5 years.
401(k)
- Provides a way to save money tax free for retirement.
- Often times companies will match a percentage of each $1 you contribute to their 401(k) plan.
- When this happens you not only get a bonus from avoiding taxes, but you are receiving a bonus from your employer.
- In 2010 the maximum contribution you can make to a 401(k) is $16.5k.
- After you’re 59.5 years of age you can begin to withdraw funds from your account without penalty – your withdrawals will be taxed regardless.
Please note that the guidelines above applied to the most general cases. Exceptions to these rules does exist. Consult the IRS’s home page for the most up-to-date information.
