Traditional IRA or Roth IRA?

Even though individuals have until the tax filing deadline next April to make all of their contributions to a Traditional or Roth IRA, really it would be wiser to start thinking about that stuff now, before the holiday spending begins. Which one is best for you--Traditional IRA or Roth IRA?
Depends.
Do you make a decent six-figure income? If so, the Roth is not an option. If not, however, the Roth IRA is a great option for people who want to put away some money now that will come out tax-free in retirement. So, basically, if you have a job and are making less than $100,000 your tax planner will likely concur that you can make your maximum contribution to a Roth IRA--at least $5,500 currently.
Are you covered by a retirement plan at work? If not, you could instead fund a Traditional IRA, and it doesn't even matter how much money you make. Seriously. If you work for a n employer with no retirement plan, you can almost certainly maximize and deduct your contribution to a Traditional IRA. As always, check with a CPA first.
Just yesterday I was talking to a woman who is 59 and has very little saved up for retirement. After an extended set-back after losing a job and then taking a new one that paid about 1/2 of what she used to make, she is about to get re-hired by a good company with a 401(k) plan. In order to catch up, she needs to maximize her 401(k) option, which would let her put aside up to around $20,000 between her and her employer's contributions. Since she'll never earn $100,000, she can also take advantage of a Roth IRA. The Traditional IRA for her is not attractive, as her 401(k) participation plus her income level (around $70,000) will remove her ability to deduct a contribution to a Traditional IRA.  She could  put an after-tax contribution into a Traditional IRA, but I see no reason to do that, not when her income is well south of the cut-off for Roth contributions. Need help with your Series 7

Fun with IRAs

Remember that when you're doing the 1,500 or so practice questions in our new Pass the 7 ExamCram Online Test Prep, you're seeing questions that should be very similar to what you'll see on the test. But only some of them will seem like close replicas; many of the questions at the testing center are going to shock the heck out of you. Half of those shockers are really familiar concepts that have been distorted so horribly that you no longer recognize what you're being asked. The other half are just questions no one could have known would show up based on the exam outline. That's why you have to develop test-taking skills. You need to use process of elimination so that you will minimize the errors that people make on questions they sort of knew and maximize the number you get right on questions your sort of don't. Let's enjoy a practice question on IRAs and approach it with all the skill and strategy you can muster:

Which of the following is true of a Roth Individual Retirement Arrangement but not a Traditional Individual Retirement Arrangement?
A. REITs may be held within the account
B. income limits prevent the deductibility of contributions
C. income limits prohibit certain individuals from making contributions
D. withdrawals must begin the year following the individual's 70 1/2th birthday

EXPLANATION: your job is to read each answer choice and ask first if it's true about Roth IRAs and then, is it not true of Traditional IRAs. Start with A--is that true of a Roth; can you buy REITs in it? Sure? Is that not true of the Traditional IRA? No, you can also buy them in a Traditional IRA, so choice "A" is eliminated. Your odds now rise from 25% to 33.3%. What about B--do income limits prevent the deductibility of contributions? Uh-oh. You don't deduct contributions to a Roth, so I guess income limits don't affect the deductibility. Unless you're reading it wrong, which is what the question wants you to worry about. Hmm. What about C--do income limits prohibit individuals from making contributions to their Roth IRA? Yes. Does that happen in a Traditional IRA? Actually, no, it does not. But most people confuse this statment with whether a rich person with a 401K established can deduct her contribution to a Traditonal IRA--totally different question. Of course, you're all turned around now and might not recognize that you just found the right answer--you did. But, you have to eliminate D before you pull the trigger. When do withdrawals have to begin in the Roth? They don't. So, D is, in fact, eliminated. And, even though "B" left us confused, "C" is our best answer.

Excellent, only 259 more questions to go.

What about the new Roth IRA rules?

Many Series 7 candidates have been sending emails asking if the Series 7 exam will be testing the new Roth IRA rules for 2010. The most accurate answer is this: nobody knows.
Why not? Because nobody ever knows what the Series 7 is going to ask. There are companies out there who will give you a definitive answer here, and there are companies like Pass the Test who prefer to tell you the truth--nobody knows.

If the test does ask a question requiring you to know the peculiar situation concerning Roth IRAs in 2010, this is what you would need to know:

• Income limits still apply and prevent "high-income" people from making a contribution
• The only change is that "high-income" people can do a Roth conversion by paying tax on all the money in their Traditional IRA account and making it a Roth account

That's all that's happening this year--if you want to convert a Traditional IRA to a Roth IRA, you can do that this year regardless of your income level. If you want to add new money to your Roth IRA, you will be prevented from doing so if you reach a certain income level that is one set of numbers for single filers and another for married couples filing jointly. What are those numbers? Your firm has them somewhere, and we do not think those numbers are testable. But, again, nobody really knows for sure what is "testable" and what isn't. That's just the sort of folks we deal with when taking the Series 7 exam. They do whatever it takes to flunk about 1/3 of all test takers on any given day. Don't let the wisenheimers put you into that bottom 1/3.

IRA Contributions

Let's look at a practice question on IRA contributions.

Which of the following could reduce the amount that an individual may contribute to a Traditional IRA?
A. Roth IRA contributions made for the year
B. High income level
C. Participation in an employer-sponsored plan
D. All of the choices listed

EXPLANATION: if you were going too fast, you might have been tricked by this one. The other choices only affect how much can be deducted from the contribution, but anyone with earned income can contribute to their Traditional IRA.

ANSWER: A