Question: Which IRA should I choose?

[May 30, 2007]  Q: How many kinds of Individual Retirement Accounts can I choose from?

A: Individual Retirement Accounts, also known as Individual Retirement Arrangements, or IRAs, are tax-favored savings vehicles that can be a good choice for retirement savers.

"Fewer companies are offering traditional pensions, and Social Security is in question for the generations following the baby boom," said Greg McBride, senior financial analyst with Bankrate.com of North Palm Beach, Fla. "That should encourage people to save aggressively and utilize all options, including IRAs."

There are three main varieties of IRAs -- the traditional IRA, the Roth IRA and the nondeductible IRA. Each has its own special rules outlined in the Internal Revenue Code.

In 2007, a worker can deposit up to $4,000 a year into an IRA -- or $5,000 if he or she is 50 years or older.

Workers who don't have a company-sponsored retirement account, such as a 401(k), generally qualify for the traditional IRA.

The account is funded with pretax earnings, meaning that it reduces the saver's taxable income, and balances grow tax-deferred. Account holders can begin withdrawing their money at age 59 1/2, and taxes then must be paid. Withdrawals before that age are subject to penalties.

McBride noted that workers don't have to save the maximum amount.

"Some banks and credit unions will allow people to contribute as little as $50 a month, especially if they have it transferred automatically" from their checking accounts, he noted.

People who are covered by retirement plans at work can use pretax money to fund traditional IRAs, but only if their adjusted gross income is below $52,000 if they're single; singles can get a partial deduction with income up to $62,000. Contributions are fully deductible for married couples with income up to $83,000, and phase out at $103,000.

Ed Slott, a certified public accountant from Rockville Centre, N.Y., who is an expert on IRAs, is a big fan on the Roth IRAs, which were championed in Congress by the late Delaware senator, William V. Roth Jr.

Slott, who is the author of "Your Complete Retirement Planning Road Map," said that workers who put money into a Roth IRA don't get the tax deduction upfront.

"But the money grows tax-free forever, so you never have to worry about the uncertainty of future tax rates -- which more than likely will go up," he said.

Participation is limited by income. Roth contributions are allowed for singles with adjusted gross income of less than $114,000 and couples with income of less than $166,000.

"I think more people should do Roths," Slott said. "Too many people are consumed with the tax deduction on traditional IRAs, but I think it's better to pay a little (tax) now for a tax-free windfall forever."

And while holders of traditional IRAs must begin mandatory withdrawals after they turn 70 1/2 years old, the mandatory withdrawal doesn't apply to Roths. That makes the Roth a good vehicle for people who want to leave money to children and grandchildren, he said.

The final account is the nondeductible IRA, for those taxpayers who don't qualify for either a traditional or Roth IRA. Contributions are not tax deductible, but the account grows tax-deferred. When the money is withdrawn, only the earnings portion is subject to tax.

Taxpayers can get more details about IRAs from the Internal Revenue Service online site at http://www.irs.gov or from IRS Publication 590, "Individual Retirement Arrangements."

On the Web:

• http://www.bankrate.com

• Slott's site: http://www.irahelp.com

[Text copied from file received from AP Digital; article by Eileen Alt Powell, AP business writer]