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Tax Knowledge: Is a Roth IRA Better than a traditional IRA?

The traditional IRA is a tax-deferred retirement product that permits individuals to set aside money each year, with earnings tax-deferred until withdrawals begin at age 59½ or later (or earlier, with a 10 percent penalty). The Roth IRA was introduced in 1997 as a variation of the traditional IRA that allows for after-tax contributions, but the earnings would generally be received on a tax-free basis when distributed.

Each product was designed with a specific purpose in mind, so it is important to understand what your end goal is and which product best suits your individual needs. A Roth IRA may be a better choice for those who will have a higher income tax rate in retirement or who will want the flexibility to accumulate retirement funds on a tax-favored basis without mandatory distributions.

For tax-free distributions from a Roth IRA, the account must be open for five tax years, and the distribution must be made for one of the following reasons:

Upon reaching age 59½;
Upon the death or disablement of the owner; or
Upon the purchase of a first home ($10,000 lifetime maximum)

In addition, Roth IRAs are not subject to the required minimum distribution rules while the owner is alive. As a result, the Roth IRA can be used more flexibly, on a tax-favored basis, for retirement and wealth transfer purposes.

IRAs are powerful financial tools. If you think an IRA might make sense for you, contact a qualified financial professional.

Prudential and its licensed financial professionals do not give tax or legal advice. Be sure to consult with your tax and legal advisors regarding your personal circumstances.

0180488-00001-00, Ed 6/9/2010, Exp 12/2/2011

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About the Author

Gregory Linzey, Baystate Financial Services
1155 Elm St, 6th Floor
Manchester, NH 03101

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