The Traditional IRA

• With a traditional IRA, eligible workers can put money away for retirement and deduct that contribution from their taxable income for the current tax year. Those deductions can be quite significant, and many workers find that the up-front tax savings are well worth the fact that the withdrawals from a traditional IRA are taxed as ordinary income. When the earnings are withdrawn in retirement, the IRS will tax those withdrawals at prevailing rates. This means the traditional IRA is best suited for those who expect to be in the same or a lower tax bracket after they stop working.
  
  

The Roth IRA

• The Roth IRA provides an interesting twist on the retirement income picture. While traditional IRAs give workers an up-front tax break in return for taxable income in retirement, the Roth IRA reverses this formula. With a Roth IRA, workers put away after-tax dollars and cannot claim a tax deduction for their contributions in the current tax year. In exchange for this, retirees with a Roth IRA are entitled to tax-free treatment of their funds after they retire. The ability to withdraw money from an IRA tax-free is certainly an attractive one, especially for those who expect to be in a higher tax bracket after they retire.
  
  

Running the Numbers

• Some people find it difficult to determine which IRA option is the best choice, but help is available in the form of tax preparation software. Whether you use TurboTax, Tax Cut, Tax Act or another tax preparation package, you can easily run the numbers to determine the best tax saving strategy for your situation. By running the numbers before you invest, you can see how much money an investment in a traditional IRA can save you, making it easy to compare the value of those up-front tax savings to the long-term tax savings of a Roth IRA.