Which IRA Is Right for You?http://www.fool.com/retirement/iras/2012/03/28/which-ira-is-right-for-you.aspx Dan Caplinger
March 28, 2012
If you're trying to save for retirement, you probably know how an IRA can make a huge difference in your long-term success. But as with so many things that have to do with tax law, you have a number of different choices to consider -- and it can be tough to figure out exactly what kind of IRA is best for you.
Choosing the right IRA is important, so later in this article I'll give you some guidelines for deciding which type of account is most likely best for people in a number of common situations. First, though, let's make sure you're familiar with the different IRAs that are available.
An IRA by any other name
But since then, the term "IRA" has been used in a number of contexts, not all of which have anything to do with retirement. So-called "Education IRAs" -- now known as education savings accounts -- operated much like retirement accounts, but with the goal of saving for college expenses, rather than retirement. "Simple IRAs" were simplified pension plans for small businesses to use in lieu of more complicated and expensive alternatives.
Another type of IRA, however, is of key importance. The Roth IRA is fundamentally different from traditional IRAs in that Roth IRAs offer tax-free income -- at the cost of giving up the tax deduction when you first contribute money into the account.
So how should you pick?
First of all, some taxpayers won't have a choice. Roth IRA contributions aren't available to taxpayers who earn more than a certain amount, so if you're above the threshold, a traditional IRA will be your only option. In some cases, you won't even be allowed to take a deduction for that traditional IRA.
But assuming you can choose either type of IRA, current and future tax rates play a key role. In general, if you expect your tax rate to rise in retirement, then a Roth IRA is preferable. But if your taxes will be lower in retirement, you'll get more value from a current deduction, even if you end up having to pay tax after you retire when you make withdrawals -- thus making a traditional IRA the smarter move.
In addition, the investments you'll choose make a difference. Traditional IRA withdrawals get taxed at ordinary rates, so it's often best to put investments that produce ordinary income in them. That includes mortgage REITs Annaly Capital (NYSE: NLY ) and American Capital Agency (Nasdaq: