www.ambiente.us    APRIL | ABRIL 2011

Which investment option is best for you - Traditional IRA
or Roth IRA?
by Eddie Sierra

With tax season in its prime and the latest report from the government citing that
Americans saved less during the month of January and February.  There is no
better time to put away your IRS refund and/or take advantage of the tax breaks
provided by traditional or Roth IRAs. Amid the threat of inflation that is intimidating
our fragile economic recovery, and that is also circling around our backs as a
ferocious carnivore; alongside the instability in the Middle East and other
petroleum exporting countries. Americans are feeling the pinch at the gas pump
and the cash registers across the nation as the cost-of -living becomes more
and more expensive with companies downsizing their portions on their products
on the shelf, from tuna cans to saltine crackers and corn chips, consumers are
being charged more for less as a way to help offset the company’s rapid
increase in energy and production prices. However, that should not be a deterrent
to start your savings plan today and to sit down with your financial planner to
examine your investment portfolio and take advantage of the tax-benefits provided
by the IRS on individual retirement accounts (IRA).
While this column has discussed 401K and small businesses in the past, today
I will discuss the Roth IRA and how it can help you manage your retirement while
saving a bundle in taxes. While traditional 401Ks have conventionally favored
most working-class individuals, Roth IRA - is a unique type of retirement plan
under U.S. law that is commonly not taxed, provided certain conditions are met.
The Roth Individual Retirement Account (IRA) is one of a number of plans
allowed under the tax law of the
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United States that allows a tax-reduction on a restricted amount of saving for retirement. The
Roth IRA is named for its lead legislative sponsor, the late Senator William Roth of Delaware.
The Roth IRA’s primary difference from nearly all other tax advantaged retirement plans is that,
rather than granting a tax break for money placed into the plan, the tax break is granted on the
money withdrawn from the plan during retirement. This investment vehicle can change the way
employees save and plan for retirement.
The Roth 401(k) feature is a provision of the Economic Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA) that went into effect on Jan. 1 of this 2006. Contributors to the plan that offers
the feature to make contributions on an after-tax basis, and qualified withdrawals of those
assets and any earnings at retirement are tax-free. By contrast, a traditional 401K plan gives
contributors an immediate tax break in the form of pre-tax contributions, but withdrawals at
retirement are taxed as income. Perhaps the most important element of the Roth 401K feature,
however, is its built-in sunset provision.  In general, the treatment of Roth 401(k) contributions is
similar to that of traditional 401(k) contributions except for their tax status when contributed.
Employees may choose to make both Roth IRA and traditional 401K deferrals throughout the
year and even during the same pay period. However, the total of those contributions cannot
exceed the annual dollar limit on individual 401K deferrals, which is $15,000.  Employer
contributions are not eligible for Roth treatment; they must be made on a pretax basis.
Withdrawals from a Roth 401K are tax-free if they are made when the Roth IRA account has been
in place more than five years and the participant attains age 59 ½, dies or becomes disabled.

Disclaimer: Ambiente assumes NO responsibility for the financial products discussed in our columns. We
strongly urge to seek advice from a Certified Financial Advisor or Certified Financial Planner who can
better guide you on your individual financial needs.

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