There are two main types of IRAs --- traditional and Roth --- both of which are retirement vehicles that provide tax-deferred growth to the funds within them. Traditional IRAs delay taxes until you withdraw funds from the IRA. If you contribute to a Roth IRA, you pay taxes when you make the contribution, and when you withdraw the money at retirement, no further taxes are due.
Your financial situation fluctuates through your lifetime. It is difficult to predict whether you will be in a higher or lower tax bracket when you retire. Investing in both types of IRAs allows you to deduct part of your contributions each year, and you'll be able to count on receiving part of your retirement funds tax-free. Your Roth IRA helps you take advantage of being in a higher tax bracket at retirement, as at least a part of your income won't be taxed. Your traditional IRA has an advantage if you're in a lower tax bracket at retirement, as your funds are being taxed at a lower rate than they would have been when you set up the IRA.
Early Withdrawal Penalties
Because IRAs are meant to be savings vehicles for retirement, there are penalties in place for withdrawing funds before your retirement age. With a traditional IRA, if you withdraw money before age 59 1/2, in addition to including the withdrawal on your taxes you may be required to pay a 10 percent early withdrawal penalty. The only exception is if you pay the funds back to the IRA within 60 days. With a Roth IRA, you may withdraw funds at any time, although you may incur a penalty if you're younger than age 59 1/2 and you withdraw any of the interest your account has earned. Roth IRAs have no provision for withdrawing, then returning, the money to your account. Owning both types of IRAs allows you to withdraw from the account that best meets your needs. If it's a short-term need, withdrawing from the traditional IRA makes sense. If you're not going to be able to repay the withdrawal, then a distribution from your Roth IRA may be the best option.
Traditional IRAs require you to take distributions beginning at age 70 1/2. There is no maximum to how much you may withdraw. The minimum is calculated based on your age and the amount of funds in your account; the company that your traditional IRA is with will let you know your required minimum distribution each year. Roth IRAs don't require minimum distributions. When it comes to distributions, there's no particular advantage to owning both types of IRAs, but there's no disadvantage either.
Owning both types of IRAs doesn't double the amount you may contribute to an IRA each year. The maximum contribution to IRAs in 2010 was $6,000 for people age 50 or older and $5,000 for all others. The combined contributions can't exceed the maximum. You may divide your contribution between the two however you'd like. Even if you own both types of IRAs, you don't have to contribute to both each year. You may alternate between the two however you'd like, as long as your contribution doesn't exceed the maximum allowed.
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