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Traditional or Roth IRA?

Even if you are saving for retirement in your employer’s workplace plan, you are eligible to contribute to an IRA—and so is your spouse. Think of an IRA as your own personal pension plan. At John Hancock Investments you can open an IRA with as little as $2,500 and for 2012, you can contribute the smaller of to $5,000 ($6,000 if you're age 50 or older) or your taxable compensation for the year. For 2013, you can contribute the smaller of $5,500 ($6,500 if you're age 50 or older) or your taxable compensation for the year.

Traditional IRAs

Generally speaking, everyone with earned income is eligible to contribute to a Traditional IRA. The money you set aside in a Traditional IRA can help you build toward a secure retirement. It can also help you reduce your current tax bill. If your employer doesn’t offer a retirement savings plan—or if you meet other eligibility requirements you may be able to deduct your contribution for tax purposes. Even if you don’t qualify for a tax break, any earnings on the money you contribute compounds tax-deferred. You won’t pay any taxes on it until you withdraw it.

It’s a good idea to delay withdrawals  from a Traditional IRA until you are age 59 1/2 in order to avoid a 10% penalty tax on early withdrawals.  At age 70 1/2, you’ll be required to withdraw a minimum amount each year from your IRA, based on an IRS formula. If you miss a withdrawal, you could be subject to a 50% penalty.

Roth IRAs

A Roth IRA offers a different approach to tax savings: You can’t deduct your contribution, but you can look forward to a lifetime of tax FREE growth and tax FREE withdrawals from a Roth IRA if you meet these requirements. Keep your Roth IRA for at least five years, and wait until you are at least age 59 1/2 before you touch your earnings. There’s one more advantage to a Roth IRA: you won’t be required to take any distributions from a Roth IRA in your lifetime. You can let your money continue to compound tax free as long as you want. And, you can pass a Roth IRA on to your beneficiaries. They will be required to withdraw a certain amount from the account every year, but the income will remain tax free.

While anyone is eligible to contribute to a Traditional IRA, you must meet eligibility requirements to contribute to a Roth IRA (see table). If you are eligible to deduct your contribution to a Traditional IRA and you also meet the eligibility requirements for a Roth IRA, you should discuss the trade-offs with your financial professional before making a decision. You may be eligible for either, but you cannot contribute to both a Traditional IRA and a Roth IRA in the same calendar year.

Traditional vs. Roth IRAs: Compare benefits and eligibility requirements before you choose

 RothTraditional
Eligibility
 
Workers of any age (subject to income limits); also non-working spouses. Workers under age 70 1/2
Single filers, head of household or married filing separately and didn't live with spouse at any time suring year: income up to $110,000 for full contribution. For 2013, income up to $112,000 for full contribution. No income limits
Joint filers income up to $173,000 (for full contribution). For 2013, income up to $178,000 for full contribution.  
Maximum Annual Contribution For 2012, $5,000 or 100% of compensation. Individuals age 50 or older can contribute an additional $1,000.
For 2013, $5,500 or 100% of compensation. Individuals age 50 or older can contribute an addtional $1,000.
Tax Deductibility Contributions are not tax-deductible Contributions tax deductible if neither spouse is covered by a retirement plan at work or if only one spouse is covered by a retirement plan at work and for 2012, the AGI is less than $173,000; partial deductibility for AGI of $173,000-$183,000; contributions fully tax deductible even if owner participates in employer's qualified retirement plan and AGI is no more than $58,000 for single filers, $92,000 for joint filers. For 2013, the AGI is less than $178,000; partial deductibility for AGI of $178,000-$188,000; contributions fully tax deductible even if owner participates in employer's qualified retirement plan and AGI is no more than $59,000 for single filers, $95,000 for joint filers.
Federal Tax Advantages Federal tax-free growth Federal tax-deferred growth
Withdrawals Can withdraw contributions anytime without penalty or tax; can withdraw earnings tax-free after five years and after age 59 1/2. No required minimum withdrawals in lifetime. May withdraw after age 59 1/2 without penalty; must begin required minimum withdrawal s at age 70 1/2.


This material does not constitute tax, legal or accounting advice and neither John Hancock nor any of its agents, employees or registered representatives are in the business of offering such advice. It was not intended or written for use and cannot be used by any taxpayer for the purpose of avoiding any IRS penalty. It was written to support the marketing of the transactions or topics it addresses. Anyone interested in these transactions or topics should seek advice based on his or her particular circumstances from independent professional advisors.

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