Both Traditional and Roth IRA’s have many things in common:

• They allow you to build wealth for retirement.
• They allow for flexibility in investment selection including stocks, bonds, and mutual funds. The account can be rebalanced as often as you’d like, without generating any current tax liability.
• They each impose an early-withdrawal tax of 10 percent if a distribution is taken before you are 59.5, though there are some exceptions.

Let’s look at how they differ:

In general, just about anyone can contribute to a Traditional IRA. They must simply be under the age of 70.5 and have earned income. Contributions usually grow tax-deferred, and distributions taken once you turn 59.5 are taxed as ordinary income. Your contributions may be tax-deductible, depending on your tax-return filing status, whether you are eligible to participate in an employer-sponsored plan, and your modified adjusted gross income (MAGI). The Traditional IRA can grow tax-deferred until the year that you reach the age of 70.5. At this time, the government is interested in receiving some taxes from your account. If you are holding multiple Traditional IRAs at various institutions, or have multiple retirement accounts with different employers, it often makes sense to consolidate all of those accounts into a “rollover” IRA.

The Roth IRA has some eligibility requirements. Individuals of any age with earned income are eligible. A single person with a MAGI of $107,000 or less, or a married couple filing jointly, with a MAGI of $169,000 or less can make a full contribution. Partial contributions are allowed at higher income levels. These annual contributions are taxed up-front. However, you are not required to pay federal (and possibly state) income tax on distributions if you have had the account open for at least five years or are 59.5, whichever comes later.

You will often hear that a Roth IRA is a wiser choice if you are expecting to be in a higher tax bracket in the future, since you will be paying taxes on your contribution when it is made, as opposed to when it is withdrawn as with a Traditional IRA. The best way to make this determination is to speak to a Financial Advisor who can assess your goals, risk tolerance, and time horizon, and develop a customized retirement strategy that will work best for you.

Janet Redman is a financial advisor with Merrill Lynch. Email her at This e-mail address is being protected from spambots. You need JavaScript enabled to view it. .