The Traditional IRA is an Individual Retirement Account that may allow contributions to be made on an income tax-deductible basis. Earnings grow income tax-deferred, while withdrawals of income tax-deductible contributions and earnings are taxed at ordinary income tax rates.

The Roth IRA is an Individual Retirement Account, where contributions are made on a non-deductible basis. Earnings and the withdrawal of those earnings are income tax-free if the account is held for at least five years and you are 59½ or older.

Anyone under age 70½ with earned income can contribute up to $4,000 per year to a Traditional IRA. However, whether or not you qualify to deduct your contributions is determined by whether you or your spouse participate in an employer-sponsored retirement plan and the amount of your adjusted gross income (AGI).

As of 2005, any person at any age can contribute up to $4,000 per year to a Roth IRA as long as you or your spouse have earned income and your AGI is within established income limits.

You need to determine if an immediate income tax deduction for contributions to a tax-deductible Traditional IRA is more valuable to you than a future income tax-free benefit from a Roth IRA. Use the Roth vs. Traditional IRA calculator to help you compare.

To the extent withdrawals from a Traditional IRA or Roth IRA are income taxable, they may be subject to a 10% premature withdrawal penalty. However, the penalty will not apply if you are over 59½ years of age or disabled, or you use the funds for qualified educational or medical expenses or for a first home purchase, or you take the funds as a series of substantially equal periodic payments.

If you have assets in an IRA or IRA Rollover, you can convert to a Roth IRA if your AGI is $100,000 or less for the year in which you wish to convert. There are, however, other factors you should consider before converting. Use the Roth IRA Conversion calculator to learn about these factors.

You will have to pay income taxes on all tax-deductible Traditional IRA contributions and earnings converted to a Roth IRA, in the same year as the conversion (except in the year 1998, when you were allowed to spread the payments over a four year period).

If you do not expect to have enough money (from a non-IRA source) to pay the income taxes, you are probably better off not converting. In addition, if any money converted to a Roth IRA is withdrawn in the first five years, a 10% penalty may apply to the converted amount.