BOSTON (CBS) – Before I can answer a question, I need to ask questions. Are you maximizing out your retirement plan at work such as your 401(k)? Money should go here first especially if the company matches your contribution.

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If you have extra cash or you don’t have a retirement plan at work, consider using an IRA. Now which one depends on age, income and needs. There are distinct differences between the two IRAs.

Traditional IRA: Possible tax deduction, taxed as ordinary income when withdrawn. Mandatory withdrawal age is 70½. Tax deferral compounding. May have income limits if you have a retirement plan at work.

Roth IRA: Contribution is made with after tax dollars, but not taxable when withdrawn. No mandatory withdrawal age. There is an income limit to contribute, $118,000 (partial contribution for income between $118,000 to $133,000) if you are single or $184,000 (Partial contribution for income between $184,000 to $194,000) if you are married filing jointly.

Sometimes tax-free future income is worth more to you than a deduction right now. I found a calculator at Money Chimp to help you figure out which is a better deal; a deduction now or tax-free income in the future.

With no mandatory withdrawal age for Roth IRAs this means they could be a wealth transfer tool with your heirs having the ability to take income out of the IRA over their lifetime tax free after you die.

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You are limited to a $5,500 contribution this year to a traditional IRA or Roth. If you are over 50 you can add an additional $1,000. And you must have earned income. W-2 kind of income.

You can get at your Roth contributions any time you need them in the future without the 10% penalty that would be there for a traditional IRA if you are under 59½ and you will not owe taxes on them for you have already paid the taxes. You will not be able to get to the interest the Roth has earned without paying a penalty if you are under 59½.

Check out the IRS publication 590.


You can hear Dee Lee’s expert financial advice on WBZ NewsRadio 1030 each weekday at 1:55 p.m., 3:55 p.m., and 7:55 p.m.

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