With tax season approaching, I wanted to share information about a tax-advantaged retirement account that everyone receiving taxable compensation in 2014 can fund. You have until April 15 to make an Individual Retirement Account (IRA) contribution of up to $5,500 1 for the 2014 tax year. Accounts and Eligibility
There are two types of IRAs -- Traditional and Roth.
You can make a full Roth IRA (post-tax) contribution if your individual* 2014 Modified
Adjusted Gross Income (MAGI) 2 is less than $114,000 -- or a partial contribution if it’s between
$114,000 and $129,000.
*Married filing jointly:

2014 Roth income limit threshold is between $181,000 and $191,000
2014 Traditional income limit threshold is between $96,000 and $116,000
Contribution limit of $11,000 (two individual IRAs of $5,500 apiece)
MAGI figures provided below are based on an individual tax filer

You can make a full Traditional IRA (pre-tax) contribution if your modified AGI is less than
$60,000 -- or a partial pre-tax contribution if it's between $60,000 and $70,000.

Roth IRA
The appeal of the Roth IRA is the ability to invest after-tax money so that it grows tax-free over time, and then you use that money in retirement. Besides compounding tax-free, all withdrawals are tax-free, unlike a Traditional IRA or standard 401(k) account. You also have the option to withdraw your initial contributions at any time without penalty, not that it's advisable to, but having that flexibility makes the account more attractive.
An underlying principle of a Roth IRA is that your tax rate now would be lower than your tax rate later. Therefore, receiving tax benefits later will be of greater value than experiencing tax benefits now.
Investments that compound and are withdrawn tax-free (no capital gains or dividend taxes) grow substantially faster than would normally be the case. In essence, the Roth IRA is like a savings account that you should never have to pay taxes on again.
Traditional IRA3
If your individual 2014 MAGI is below $60,000, the Traditional IRA functions similarly to a standard pre-tax 401(k) account. That is, you could contribute pre-tax dollars, have the money
1

Individuals age 50 or over at the end of 2014 can make an additional $1,000 catch-up contribution
MAGI is essentially your total income minus pre-tax 401(k) contributions
3
Income limits only apply if you are covered by a qualified employer-sponsored retirement plan like a 401(k)
2

grow tax-free, and then pay taxes on all withdrawals in retirement. If your top federal marginal tax rate is currently 10% or 15%, there is a strong likelihood of experiencing a higher tax bracket by retirement age, so the Roth could be a more advisable option. Some employers may not offer a 401(k) plan, and in combination with having a 25% federal marginal tax rate, the Traditional
IRA account would merit serious consideration.
There is very limited benefit for anyone earning more than $70,000 to open this account.
Contributions are made on a post-tax basis rather than pre-tax, the account grows tax-free over time, but then earnings are taxed upon withdrawal in retirement. It is worse than a 401(k) and only marginally better than a normal investment account.
Unlike the Roth, you would generally get penalized for withdrawing contributions before turning
59 ½. This early withdrawal penalty amounts to 10% of your distribution, and is in addition to any income taxes that are owed. Moreover, Traditional IRA withdrawals are required once you turn 70 ½, whereas the Roth account has no such restriction.