It seems like a long time ago – and it probably was – when I decided to suspend my ROTH IRA contributions in order to focus on eliminating my debt.

But lately, while looking forward to the future, I’ve been thinking of the difference between a traditional and Roth IRA. More specifically, I’ve been wondering if when I re-start my contributions, will I still be in the right vehicle for me.

So in order to answer this question, I took a look at the difference between the two.

In a traditional IRA…

• The money you deposit is not taxed
• Besides the initial deposit – which is taxed – you minimize your taxable income through using a traditional IRA
• Earnings on your contributions are not taxed until withdrawn
• Any withdrawals before you turn 59 1/2 are subject to a 10% early withdrawal penalty
• Unless used for qualified exceptions
• You are taxed upon withdrawal

In a Roth IRA…

• Contributions are not deductible
• Earnings on your contributions are NEVER taxed
• Roth IRA offers tax-exempt earnings, not just taxed-deferred
• A traditional IRA taxes you on your gains once you make the withdrawal. The Roth never taxes you again post-contribution
• Any withdrawals before you turn 59 1/2 are subject to a 10% early withdrawal penalty
• Unless used for qualified exceptions

So, it basically comes down to tax me now or tax me later. This is where some information about tax brackets might come in handy…

Courtesy of 360financialliteracy.org

Generally, a tax bracket is the income tax rate at which you are taxed for a certain range of income. The income ranges vary, depending on your filing status: single, married filing jointly (or qualifying widow(er)), married filing separately, or head of household. Brackets are expressed by their marginal tax rate, which refers to the rate at which your next dollar of income will be taxed. There are six marginal tax rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.

Year 2004 federal income tax rates for single taxpayers are as follows:

If Taxable Income Is:	Your Tax Is:
Not over $7,150	10% of taxable income
Over $7,150, but not over $29,050	$715 + 15% of excess over $7,150
Over $29,050, but not over $70,350	$4,000 + 25% of excess over $29,050
Over $70,350, but not over $146,750	$14,325 + 28% of excess over $70,350
Over $146,750, but not over $319,100	$35,717 + 33% of excess over $146,750
Over $319,100	$92,592.50 + 35% of excess over $319,100

So…to me (and again I could be wrong – please comment and correct me if I am) it seems that the more money you have, the more you can be taxed.

Therefore, wouldn’t it make sense to have your money grow tax-exempt so that your taxes are taken out at a bracket used for a person of lessor income, rather then later in life when you may actually be worth something…you know…in the financial sense?

Bottom line, I’m happy with my Roth.

Relevant Link: Kiplinger.com – Ride a Roth to Riches