Though Roth IRAs permit tax-free growth and withdrawals, they’re not necessarily the best choice for everyone. To help decide between any tax-deductible and tax-deferred plan, such as a Traditional IRA and its tax-free Roth version, consider your current tax bracket and your expected tax bracket at the time you plan to withdraw the funds:

• If you expect your tax bracket at withdrawal to be roughly the same as, or higher than, your current tax rate, you should probably choose the Roth version of the plan.
• If you expect your tax bracket at withdrawal to be significantly lower than your current tax bracket, you should probably choose the standard tax-deductible/tax-deferred version of the plan.

Though helpful as a general guideline, this rule of thumb doesn’t apply to all situations. Even if you expect your tax bracket at withdrawal to be much lower than your current rate, you might still consider a Roth for these reasons:

• Estate planning: Roth IRAs pass to beneficiaries without incurring a federal income tax liability, though they may be subject to estate taxes.
• Control of assets after retirement: Only Roth IRAs allow you to retain complete control over your retirement account assets past age 70 1/2, with no required minimum distributions.
• High income: Even if you earn too much to qualify for a Traditional IRA deduction, you may still qualify to contribute to a tax-free Roth IRA.

Converting a Traditional IRA to a Roth IRA

The IRS allows you to convert Traditional IRAs to Roth IRAs with no penalties. Formerly there was an income limit of $100,000 but that limit was allowed to expire. However, if your income exceeds $183,000, you may be able to convert a retirement plan to a Roth IRA but you won’t be able to make any new contributions.

One catch does apply: when you do the conversion, you’ll have to pay taxes on any gains in the Traditional IRA, even if you’re simply moving those assets into your new Roth IRA.

Converting a retirement plan to a Roth IRA at Scottrade is SUPER EASY!

Links to products or services may be affiliate links. See my disclosure policy on the site or on my About page.

Roth IRAs are one of the greatest wealth vehicles that has been made available to the average person in decades. By using after tax dollars to make your contributions, your growth and earnings are not taxed when you withdraw them after age 59 1/2!

Roth IRAs are similar to traditional IRAs, but with three major differences:

• All Roth IRA contributions are made with after-tax dollars.
• Investments in Roth IRAs grow tax-free and are not subject to tax upon withdrawal.
• Since Roth IRA contributions are made with after-tax dollars, they don’t qualify for tax deductions.

Roth and Traditional IRAs differ in a few other significant, but more complex, ways. The following table breaks down all the important traits of Roth IRAs, including all the specific features that distinguish Roths from Traditional IRAs.

Key Traits of Roth IRAs

Tax benefits

You never have to pay taxes on any investment gains or withdrawals if:

• Your account has been open for at least five years
• You withdraw at age 59 1/2 or later
• You use the money to purchase your first home
• You become disabled or die

Free trading tools. Real-time research. $7 trades. Open a no-fee Roth IRA at Scottrade!

Eligibility

Plan participants can be any age. Singles with earned income below $110,000 ($173,000 for married joint filers) can make the full contribution plus the “catch-up” contribution, if applicable. Contribution limits decrease for singles with $110,000–125,000 of earned income ($173,000–$183,000 for married joint filers). Singles or couples with income above these ranges can’t contribute to a Roth IRA.

Vesting

All contributions vest immediately.

Enrollment deadlines

A Roth IRA for a given year must be set up by April 15 of the next year.

Contribution deadlines

All contributions to an IRA for a given year must be made by April 15 of the next year.

Contribution limits

Up to $5,000 per year or, if you’re age 50 or older, up to $6,000.

Contribution sources

Earned income (salary, commissions, other work-related sources, alimony).

Withdrawal penalties

Since Roth contributions are made with after-tax dollars and don’t qualify for tax deductions, no penalty applies to early withdrawals equal to the amount of your original contributions. Any gains realized by early withdrawals are subject to income tax and a 10% penalty, however.

Transfers

Most plans can be transferred to other Roth (after-tax) retirement plans.

Borrowing

Loans from Roth IRA accounts are not permitted.

Beneficiaries

You can designate primary and contingent beneficiaries. Roth IRAs are the only IRAs that can be passed on income tax–free to beneficiaries.

Required minimum distributions

Roth IRAs have no required minimum distributions.

Fees and minimums

Annual fees range from $0–50. Minimums range from $0–25, depending on the plan provider. However, Scottrade has no fee IRAs and you can easily use them to purchase commission free exchange traded funds.

Links to products or services may be affiliate links. See my disclosure policy on the site or on my About page.

Traditional Individual Retirement Accounts, called Traditional IRAs (or often just IRAs for short), are retirement plans that you can set up on your own, whether or not you participate in other, employer-sponsored retirement accounts.

How Traditional IRAs Work

Unlike 401(k)s, 403(b)s, and 457(b)s, traditional IRAs are retirement accounts that you set up directly with a bank, a financial services firm, or an online brokerage. Even though you’re not tied to an employer with IRAs, they do have various contribution limits based on your annual income. Here’s a quick breakdown of how they work:

You set up an IRA account: The setup process usually involves filling out a few simple forms and providing an initial deposit of $500–1,000, though some IRAs have initial deposit requirements of $25 or less. I set mine up with Scottrade.

You make contributions: You can contribute to your account at any time during the year up to the allowable limit and before the annual contribution deadline. Certain contributions can be tax-deductible, though restrictions apply (see Key Traits of Traditional IRAs below).
Your investments will grow tax-deferred which means that you don’t pay taxes on investment gains until you withdraw your assets, either after age 59 1/2 or for other qualified exceptions.

You withdraw your money after age 59 1/2: Any investment gains that you withdraw after age 59 1/2 are subject to income tax based on your tax bracket at the time at which you make the withdrawals.

$7 Online Trading. Free trading tools. Real-time research. Join ME and open a no-fee IRA at Scottrade today!

Key Traits of Traditional IRAs

Tax benefits of traditional IRAs

Contributions are tax-deductible unless you’re eligible to enroll in an employer-sponsored retirement plan and your 2012 income exceeds $56,000–66,000 (for single filers) or $90,000–110,000 (for married couples filing jointly). If you have income within these ranges, you may qualify for a reduced deduction. If you’re not eligible for an employer-sponsored plan, you can deduct your IRA contributions regardless of your income level. Once you make contributions, they grow tax-deferred until withdrawal, when taxes become due.

Eligibility with traditional IRAs

If you’re under age 70 1/2, you can set up a Traditional IRA as long as you have enough earned income that year to meet the minimum initial contribution requirement.

Vesting with traditional IRAs

All contributions vest immediately.

Enrollment deadlines for traditional IRAs

A Traditional IRA for a given year must be set up by April 15 of the following year.

Contribution deadlines for traditional IRAs

All contributions to an IRA for a given year must be made by April 15 of the next year.

Contribution limits of traditional IRAs

Up to $5,000 per year or, if you’re age 50 or older, up to $6,000.

Contribution sources of traditional IRAs

Earned income (salary, commissions, other work-related sources, alimony).

Withdrawal penalties of traditional IRAs

A 10% penalty applies to withdrawals made prior to age 59 1/2. Exceptions include death, disability, higher education expenses, and the purchase of a first home.

Transferring a traditional IRA

Most plans can be transferred to other Traditional IRAs or other (pret-ax) retirement plans.

Borrowing from a traditional IRA

Loans from IRA accounts are not permitted.

Beneficiaries in a traditional IRAs

You can designate both primary and contingent beneficiaries.

Required minimum distributions of traditional IRAs

After 70 1/2, you’re required to begin withdrawing certain minimum annual amounts as of April 1 of the year after you turn 70 1/2.

Fees and minimums of traditional IRAs

Annual fees range from $0–50. Minimums range from $0–25, depending on the plan provider. However, Scottrade has no fee IRAs and you can easily use them to purchase commission free exchange traded funds.

Links to products or services may be affiliate links. See my disclosure policy on the site or on my About page.

One of the biggest myths surrounding the purchase of life insurance is that you’re only insuring income. Nothing could be farther from the truth, just ask anyone who’s lost a loved one and had to get back to work the day after the funeral.

I have a friend who lost his young son in a tragic accident. His medical insurance had a very high $2,500 deductible with a family maximum cost of $15,000. Those numbers were quickly surpassed prior to his son passing away at the hospital. The Life Flight helicopter alone was over $8,000 but his medical insurance only paid $250 (a common standard). His son’s funeral was bare bones since he had no cash to handle the medical expenses AND the funeral costs … and he had failed to purchase any life insurance at all on his son.

Life insurance is about more than insuring income … much more

Life insurance isn’t just about families insuring the income of the main breadwinner. It’s also about three other often overlooked costs:

1. The final medical expenses
2. The funeral costs
3. The cost of your mental stability

Final medical expenses

If you lost someone close to you, especially a child, would you be able to foot the entire bill not paid by your medical insurance? Or would you have to declare bankruptcy like my friend did? When he and his wife arrived at the hospital, he had to fill out and sign all sorts of forms. To this day he doesn’t remember much about what he signed but he agreed to be financially responsible for the bills. You won’t get around this one.

Funeral costs

The average cost of a bare bones funeral today can range from $7,000 to $10,000. Do you have that amount sitting around, ready in a savings account? My friend didn’t and had to plead with the funeral home to do the cheapest funeral possible. He is still bitter about it today.

Your mental health

This one is the big unknown. A small life insurance policy may be able to let you get some professional counseling or give you the breathing room financially to take some time off from work to grieve. My friend was forced to go back to work just 3 days later, leaving his wife to grieve alone at home while she answered the phone calls from the bill collectors. She almost couldn’t handle it and considered suicide just to get some relief from her sorrow.

I can assure you, if I lost one of my children, I would need some time off and possibly some counseling. And don’t feed me that line about getting back to work right away being the best thing for me.

Life insurance on kids isn’t immoral

I personally find the morality argument extremely offensive. No one wants to “get rich” from a child’s death. That’s just sick. But insuring a child’s life isn’t any more immoral than insuring their health, their car, or your home. You’re insuring against the risk of loss and life insurance on a child helps prevent parents from experiencing even more loss, financial and otherwise.

It isn’t expensive

Fifteen year level term insurance with a $50,000 death benefit on a healthy 10 year old boy only runs about $7.50 per month. On a girl it’s only about $7.20 per month. But still, you’ll find stupid (yes, I said it) financial gurus who claim that life insurance on a child is a poor investment. Sure, it’s a poor investment if you’re looking for a return. I’m not looking for a return on my “investment,” I’m looking to insure against the risk of losing my child.

Get the exact insurance you need at InsureMe.com

One size DOES NOT fit all in personal finance and it sure doesn’t fit all when it comes to life insurance … including life insurance on your children.

Links to products or services may be affiliate links. See my disclosure policy on the site or on my About page.

403(b) plans are similar to 401(k) plans but are reserved for employees of tax-exempt nonprofit organizations, such as public schools, hospitals, foundations, charities, and churches and other religious organizations. Like 401(k)s, 403(b)s allow you to set up tax-deferred accounts and invest in mutual funds, stocks, bonds and various other investments.

403(b)s vs. 401(k)s

There are two major differences between 403(b) plans and 401(k) plans:

• Company match: 401(k) plans offer company-matching contributions much more often than 403(b) plans do.
• Company management: Companies that offer 403(b) plans are not required to be involved in the management or administration of the plans. As a result, 403(b)s often leave you with more freedom to manage your accounts, but also with less guidance.

Your employer doesn’t offer a retirement plan? Do it YOURSELF!
Click here for information on opening a no-fee Roth IRA at Scottrade!

Key Traits of 403(b) Retirement Plans

All of the major features of 403(b) plans—tax benefits, eligibility, vesting, contribution limits, and so on—mirror those of 401(k) plans. Moreover, 403(b)s work the same way as 401(k) plans: you invest pretax dollars, and the assets in the account grow tax-deferred. Or, under the Roth 403(b) variation, you invest after-tax dollars that grow tax-deferred and are tax-free upon withdrawal.

The Special 403(b) Catch-Up Provision

The “catch-up” provisions for 403(b)s mirror those of the 401(k) retirement plan – if the employer matches contributions, the annual maximum the employee can contribute is the standard $17,000 plus a “catch-up” amount of $5,500 (employers are maxed at $33,000). The one unique trait of 403(b)s is a “catch-up” provision available only to employees with 15 or more years of service with a qualified organization. If you qualify, this provision increases your contribution limit by up to $3,000 per year, up to a total lifetime catch-up limit of $15,000. If you’re over age 50, you can combine this catch-up provision with the more universal $5,500 per year catch-up contribution, which would enable you to contribute a total of up to $26,500 (for 2012) annually to your 403(b) plans.

457(b) Retirement Plans

457(b) plans are very similar to 401(k)s and 403(b)sbut are available only to U.S. government employees and employees of certain nongovernmental tax-exempt U.S. employers, such as public schools and universities.

457(b)s vs. 401(k)s and 403(b)s

457(b) plans are similar to 401(k)s and 403(b)s, with the following major exceptions:

• Withdrawal penalties: Assets in 457(b) accounts are not charged a 10% penalty for withdrawal before age 59 1/2.
• Special catch-up provision: 457(b) plans also offer a unique catch-up provision. If you’re within three years of retirement (as defined by your specific plan), you can double your usual catch-up contribution amounts, under certain conditions.
• Multiple plans: Most employers who offer 457(b) plans also qualify to offer 401(k) or 403(b) plans. If you’re an employee of such a company, you can contribute up to the maximum contribution limits of both plans. In addition, if you’re over age 50, you can contribute the special additional catch-up amount into both your 403(b) and 457(b) plans.

Links to products or services may be affiliate links. See my disclosure policy on the site or on my About page.