Types Of IRAs
Traditional IRA:...you receive a tax break up-front, when you put the money in. With a traditional IRA you put in "pre-tax" dollars, which means your contribution gets deducted from your current taxable income (which equates to a savings up-front). Let’s say you earn $25,000, and put $5,000 into a traditional IRA. That means your reported income is now $20,000, which might lower your income bracket and save tax dollars right away. Your IRA money then goes to work. All the money (the money you invest and the money you might earn (capital gains), is tax-deferred. This means it is not taxed until you take the money out (once you are retired which is many, many years ahead, BUT PLAN NOW!). The money you withdraw will be taxed at the income level you are earning when you retire. You must, however, start taking withdrawals once you reach 70½ years old.
ROTH IRA… you receive a tax break on the back end, when you take money out. With this type of IRA you put in “after-tax” dollars, which means you pay all your taxes right away on all the money you invest. But all the money you invest, and the money you make, will be tax-free when you retire. Furthermore, you don’t have to make the required minimum withdrawals when you turn 70½, you can let your money continue to grow. Using the same example, if you earn $25,000, and make a $5,000 contribution to a Roth IRA, you pay taxes on the total $25,000. If you have socked away $100,000 and with a smart investment it grows to $500,000, that $400,000 profit is yours to keep. No taxes due to Uncle Sam, i.e., the government. Note: If you have held your Roth IRA for five years, you pay no taxes once you reach 59½.
IRA For A MINOR…is for those who are under 18 who have earned income and reported it to the IRS. You can invest the equivalent of your annual earnings up to $2,000 a year, in the Roth IRA. Remember you must have a job and file a tax return. Your parent(s) must open a custodial account. Your parent(s) will control the account until you reach the age of majority, which in most States in 18. Hey, if you are really in good with your parent(s)/grandparent(s), and they can afford it, the Roth money does not have to come directly from your paycheck, it can come from them. Any adult can contribute an equal amount that you earn, or up to $5,000 for 2009 (see above) into your Roth IRA.