Tax knowledge: Is a Roth IRA better than a traditional IRA?

Juan Zhou, a financial services associate with Prudential Insurance Company of America and a registered representative with Pruco Securities LLC, explains the differences between a traditional IRA and a Roth IRA.

The traditional IRA is a tax-deferred retirement product that permits individuals to set aside money each year, with earnings tax-deferred until withdrawals begin at age 59.5 or later (or earlier, with a 10 percent penalty).

The Roth IRA was introduced in 1997 as a variation on the traditional IRA that allows for after-tax contributions, but the earnings would generally be received on a tax-free basis when distributed.

Each product was designed for a specific purpose, so it is important to understand what the end goal is and which product best suits each individual's needs.

"A Roth IRA may be a better choice for those who will have a higher income tax rate in retirement or who will want the flexibility to accumulate retirement funds on a tax-favored basis without mandatory distributions," Zhou said.

The account must be open for five tax years, and the distribution must be made for one of the following reasons:

+ Upon reaching age 59.5.

+ Upon the death or disablement of the owner.

+ Upon the purchase of a first home ($10,000 lifetime maximum).

In addition, Roth IRAs are not subject to the required minimum distribution rules while the owner is alive.

"This implies that the Roth IRA can be used more flexibly, on a tax-favored basis, for retirement and wealth transfer purposes," Zhou said. "IRAs are powerful financial tools. If you think an IRA might make sense for you, contact your qualified tax advisor."

Zhou's office is at 1 John James Audubon Parkway, Amherst. For information, e-mail Juan.Zhou@Prudential.com or call 636-1960, ext. 7325.