Kevin McCormally: I am Kevin McCormally of Kiplinger's and I am with Mary Beth Franklin, Senior Editor of Kiplinger's Personal Finance magazine to talk about Individual Retirement Accounts. Mary Beth, IRAs, we know we have two kinds, the traditional and the Roth IRA. How do they differ?
Mary Beth Franklin: Well, if you qualify for a Roth IRA, it's the best bet for most people. It means that all the money you saved over your lifetime will come out tax-free.
Kevin McCormally: What do you mean if you qualify?
Mary Beth Franklin: Whether our income limits. If you are single and earn over a $110,000, or if you are married and your family income is over a $160,000, sorry you can't participate.
Kevin McCormally: Okay, what about the traditional IRA? You get a tax deduction going in, right? And that doesn't exist with the Roth IRA.
Mary Beth Franklin: Most people can get a tax deduction from a traditional IRA but again, there are restrictions.
Kevin McCormally: It has to do with pure income and whether or not you have a pension plan at work.
Mary Beth Franklin: Absolutely.
Kevin McCormally: So, if you have a choice between the traditional and the Roth, which would you choose?
Mary Beth Franklin: I would choose the Roth because you are putting money in. Yes, you are not getting that upfront tax break, but let's say you put in $20,000 of your lifetime and after 40 years it's worth $300,000. I would like is coming out tax free and you only pay taxes on your contributions that's about $20,000. It's a great deal.
Kevin McCormally: Okay, what about withdrawal limits? Aren't there some special deals with Roths to get away your money out of a Roth that you can't do with a traditional IRA?
Mary Beth Franklin: Right, the Roth has a lot of escape hatches. First of all, since you have already paid taxes on your contributions all that money is yours to take out anytime you want, tax-free and penalty free.
Kevin McCormally: And when it comes inheritance, Is there a big difference between a Roth IRA and a traditional IRA to your heirs?
Mary Beth Franklin: Oh, absolutely, if you have a choice, tell mom and dad to get a Roth IRA because when you inherited it, it's completely tax-free. With the traditional IRA, it comes with strings attached. Every dollar you take out, you are paying taxes on.
Kevin McCormally: Okay, thank you very much.
