Would traditional IRA be better?

My husband and I are both in our early 30's. We are probably peaking at our salaries now and are in the 25% tax bracket. Also, our AGI (adjusted gross income) is such that certain deductions are starting to be phased out for us (student loan interest, dependent care credit, child care credit). I would expect for us to be in a lower tax bracket at retirement, relying mainly on investment income and social security income.

We would like to start contributing the maximum to IRA's for each of us. Currently, that would be $8,000 per year for both of us. I have almost convinced myself that a traditional IRA would be better for us given our circumstances. Any thoughts or advice (from professionals, preferably)?

No, neither one of us are self-employed and neither one of us have retirement plans at our places of employment.

Personally I would go with the Roth. If you're going to max it out either way, the Roth will be better for you in the long run. Say you max out your IRA for the next 20 or 30 years and end up with $1.5 million. If that money is in a Roth, you can withdraw the entire balance--you have $1.5 million. If that money is in a regular IRA, you can only withdraw around $1.2 million, assuming you're in the 20% bracket. Is the minor tax deduction you'll get each year really worth losing out on $300,000 in retirement funds?

Besides, you're assuming tax rates stay the same. I think we'll all be in higher tax brackets in 20-30 years because the government will have to raise them. 25% or 30% might seem very low when we retire! I'd rather not worry about that and pay taxes now.

What kind of work do you do? Are you self-employed? Do/Does your employer(s) have a retirement plan that you could contribute to?

The answers to these questions are necessary to give you good guideance.

It's too late to contribute to an IRA for 2006, but by all means do some more research and get started as soon as possible.

traditional ira gets you a tax deduction and withdrawals are taxed at that time - a roth ira is tax free

what will you invest your ira money is a tougher question

find some good solid stocks

Generally you need to decide if you will be in a higher tax bracket now or when you retire. If you think your tax bracket will be lower when you retire, go traditional and pay the taxes later when you take out the money. If higher when you retire, go roth and pay the taxes now. If your employer has a 401(k) Plan and they match your contribution, but your money in that before maxing your IRA. The match will be free money to you and you will still be saving for retirement.

Insufficient info to give you real good advice, but you are correct in maxing out the contributions. A 'rule of thumb' is this: Your investments should be allocated appropriate to your age between stocks and interest earning vehicles (bonds, CD's and others). This is truly over simplified as each situation has unique factors; Take the number 100, subtract you age (ex. 100-31=69). the resulting number is the percentage that should be allocated to growth(stocks), in the example; 69% of the IRA would be dedicated to stocks, individual ones,or better, mutual funds/index funds that you feel comfortable with. 31% of the IRA funds would be dedicated to debt instruments(bonds, CDs, Government paper, etc.)

At your age range, you can be aggressive with the stock side, and you can be either consertive or basically risk free on the interest earning side. GNMA mutual funds will get you the highest possible returns that are absolutey guaranteed, corporate bond funds are conservative if invested in AAA & AA rated bonds. High yield funds (called junk bond funds) offer the highest returns and in truth are not all that risky. (Huge portfolios with large number of bond issues mitigate much of the risk)

Two extremely important things you need to know. NEVER, EVER put an annuity in an IRA. It is more than stupid to do so. If you like annuities (I love them for certain needs) just buy the thing. It is tax deferred just like an IRA, putting one inside of IRA serves no purpose, and defys logic. If some one is telling you to do this, it is only for the very generous commissions to be had. That is the ONLY reason. Point two is similar, never put municipal bonds in an IRA, same reasons, they are free from federal taxes forever, and can be used (the interest earned) at any time and with no penalty.

Good luck, and Good Fortune! e-mail if you like, I don't sell anything, thirty years of that was quite enough! :)

The information you provide indicates that you logically would be better off with a traditional IRA. However, you are both young and predicting your futures could be difficult. You or your husband could end up with very different work histories and careers than you now anticipate. Earning power for most people tends to peak in their 40's and 50's, and you may be underestimating your financial futures. If so, you could end up in the same or a higher tax bracket in retirement.

Given that there are so many unknowns, maybe you should think about putting half your retirement dollars in a traditional IRA and the other half in a Roth IRA. That way you've hedged your bets to some degree. Invest in a diversified mutual fund--something like a lifecycle or target retirement date fund would be the easiest way to accomplish this. Mutual fund management companies like Vanguard and Fidelity have low cost lifecycle or target retirement date funds.