1. Traditional deductible IRAs. Every year, the lesser of the maximum IRA contribution or your earned income can be contributed. Contributions are deductible on your current year tax return and all earnings are tax deferred until withdrawn. At withdrawal, deductible contributions and earnings are taxed at ordinary income tax rates. Contributions can only be made until age 70 1/2, when you must start taking minimum required distributions.

If you and your spouse aren't participants in a company-sponsored pension plan, you can makedeductible contributions regardless of the amount of your adjusted gross income (AGI). A spouse who isn't an active participant can make a contribution even if his or her spouse is a participant, as long as the couple's AGI does not exceed $167,000 to $177,000.

2. Roth IRAs. Contributions are not deductible on your current year tax return, so contributions are made from after-tax dollars. However, as long as the distribution is qualified, all earnings are withdrawn tax free. Again, the lesser of the maximum contribution or your earned income can be contributed every year. Contributions can be made at any age, even past age 70 1/2, and no mandatory withdrawals are required.

Contributions can be made by single taxpayers with AGI less than $105,000 and married taxpayers filing jointly with AGI less than $167,000. It doesn't matter whether you are a participant in a company-sponsored pension plan. Contributions are phased out for married taxpayers filing jointly with AGI between $167,000 and $177,000 and for single taxpayers with AGI between $105,000 and $120,000.

3. Traditional nondeductible IRAs. Contributions are not deductible on your current year tax return, but earnings are tax deferred until withdrawn. At withdrawal, earnings, but not contributions, are taxed at ordinary income tax rates. Contributions must stop at age 70 1/2, when you must start taking minimum required distributions. All taxpayers, regardless of income or pension plan participation, can make contributions.

Contributions. The maximum annual contribution is $5,000 in 2010. Individuals age 50 and over can make additional catch-up contributions of $1,000 in 2010 (figures are unchanged from 2009).

Withdrawals. With all three types of IRAs, you can make withdrawals without penalty starting at age 59 1/2(with a Roth IRA, the distribution must also be made at least five tax years after your first contribution).

Which IRA should you choose? With so many different rules, it can be difficult to decide which alternative to select. Consider these points:

• A Roth IRA is always a better alternative than a traditional nondeductible IRA. While both have nondeductible contributions, qualified distributions from a Roth IRA are tax free, and taxes must be paid on the earnings in a nondeductible IRA.



• When deciding between a traditional deductible IRA and a Roth IRA, consider your current marginal income tax bracket and your expected bracket at withdrawal. If your marginal tax bracket will be the same at both times, either IRA will produce a similar result. Declining marginal tax rates may make a deductible IRA a better alternative, while increasing marginal tax rates may make the Roth IRA a better alternative.



• If you can make the maximum IRA contribution to a Roth IRA, this will result in a larger after-tax balance than making maximum contributions to a deductible IRA. This result occurs because you are essentially funding the tax bill with funds outside the Roth IRA. With the traditional deductible IRA, income taxes are assessed on the IRA assets. To offset the Roth IRA's advantage, you would also have to invest the tax savings from your traditional IRA contribution.



• # Some of the Roth IRA's features may make it a good option for you. If you don't think you'll need to make withdrawals after age 70 1/2, the Roth IRA can continue to grow on a tax-free basis. Or, if you may need your contributions before age 59 1/2, you can withdraw Roth IRA contributions at any time with no tax consequences.