Traditional And The Roth Ira example essay topic

Compare and Contrast Roth IRAs to Traditional IRAs Based Upon Farmers Insurance Information in 2002 THE TASK AND THE FINDINGS Report Authorization This analytical report of Roth IRA and Traditional IRA from Farmers Insurance Group is presented to Dr. Cynthia C. Barnes, Professor Department of Information Systems & Analysis, on November 11, 2002. Research was conducted by Josh M. Martin of Financial Specialties Incorporated upon the authorization of this topic on August 21, 2002. Objective of Comparing and Contrasting the Roth Ira to the Traditional IRA The objective of this report is to reveal the likes and differences as well as pros and cons of the Roth IRA to the Traditional IRA. The information gathered in this report will also help you to decipher which one would be right for you. Research Tactics Used in Data Gathering The method for gathering information in this report mainly involved direct contact with the employees of Farmers Insurance Group.

Two employees were given questionnaires, but the bulk came from sales agent Mr. Alton Martin. This was not the only form of data gathering used. I have listed several others below. Other methods for obtaining information was collecting data from booklets and pamphlets displayed throughout the office. Information booklets like these are readily available for the clients who come into the office. The internet played a role as well, it enabled me to search sources which were not available at Mr. Martin's office.

Layout of the Report Throughout the paper you will first see what makes the Roth IRA and the Traditional IRA different. Second, you will find the positive and negative effects compared between the two. Third, you will read to find which IRA would seem to be more beneficial and which is used more. At the end, a conclusion will be drawn from the summarized information provided by Farmers Insurance. GETTING TO KNOW ROTH AND TRADITIONAL IRAs What Makes Them Different Most people believe that a Roth IRA and a Traditional IRA are the same, but this is not so. "A Roth IRA is an Individual Retirement Annuity that allows you to buy an annuity with after-tax dollars now and withdraw principal and earnings income tax free after five years.

The Traditional IRA is a little different, in that it allows for a tax deduction up to the contribution limit if an individual does not already participate in a retirement plan. The principal and interest will be taxed at withdrawal" (Martin). This here is the main difference between the two. Not everyone knows that the differences between the two are so detailed.

Below several other differences will be discussed. Ongoing Facts As mentioned before a Roth IRA is not tax deductible, but the earnings grow tax-free. Once you have had a Roth IRA for five years you can start to draw from it. You can draw a certain percentage out that is tax-free. For example, you would use the money to put down as a payment on a first time home. On the other hand a Traditional IRA has earnings that are tax-deferred until they are withdrawn, but contributions are tax deductible.

Taxes are taken out at the end of the working age when earnings are not as high. The taxes are typically higher at retirement age than at the working age. With a Traditional IRA you can withdraw from it without penalty at the age of 59.5. You may withdraw from it before then but there may be a ten percent penalty.

The Traditional IRA requires a periodic withdrawal after the age of 70.5. Both the Traditional IRA and the Roth IRA have their positive and negative aspects. PROS AND CONS OF THE TRADITIONAL AND ROTH IRAs Positive Side of the Roth IRA The Roth IRA can be distributed income tax free and accumulate tax-free. There is no tax deduction for contributions to the account. Contributions can be made beyond the age of 70.5 and there are no withdrawal requirements at the age of 70.5. Not everything is always a plus with these IRAs though.

One positive for both the IRAs is the "contribution limit has remained at $2,000, the annual IRA for both the Roth and the Traditional IRAs gradually increase to $5,000 by 2008 with adjustments keyed to inflation thereafter" (News). Positive Side of the Traditional IRA Any kind of investment has good and bad attributes and both the Traditional and the Roth IRA are no different. As mentioned earlier in the report a positive point about the traditional IRA is that it is tax deductible. "If you " re under 70 1/2, you may be able to contribute up to $3,000 a year if single, or $6,000 if married" (Farmers New). You are allowed a tax deduction up to the contribution limit as long as the individual is not participation in a retirement plan already. "Withdrawals are only subject to a ten percent tax penalty unless withdrawn after the age of 59.5 to pay for buying a first time home, to pay for higher education expenses, or if you become disabled or die" (Farmers).

Negative Points of the Roth IRA One of the negative points of a Roth IRA that caught my eye is that it is not tax deductible. There are other negatives like a ten percent federal penalty tax for withdrawing earnings before 59.5. Another is that a persons yearly contributions are not deductible from income. So you can see a Roth IRA has it's down side also, but do not think that the Traditional IRA is perfect because it is not as you can see in the next paragraph.

Negative Points of the Traditional IRA Not everything is positive with the Traditional IRA as mentioned in the previous paragraphs. With this IRA there will be a ten percent penalty if it is withdrawn from before 59.5 as well as the income is taxed. The Traditional IRA also requires that you periodically withdraw from it after the age of 70.5. Another negative thing is that when you withdraw the accumulated interest it is taxable. Anytime you invest in something there will be good and bad aspects. These aspects mentioned in the previous sections were some of the main ones.

BENEFITS OF THE IRA Solid Information on the IRA People are always looking for a way to better their life, especially the later part of their life when they decide to retire. These people go through many investment options such as stocks, 401 K plans, and the IRA. Many times that person decides to go with the IRA for several reasons. One example is the amount of taxes you will pay with a taxable account opposed to an IRA. In the chart below you will be able to compare amounts of money saved in taxes with an IRA rather than a taxable account. In figure 1 above, "this chart compares the growth of an annual $3,000 contribution to a Traditional IRA versus the same amount to a taxable account assuming a twenty-seven percent tax rate and seven percent average annual return" (Cohen).

With figures like this, people tend to choose an IRA over any other plan. CHOOSING WHICH IRA TO USE The Process of Deciding When people come in to choose an IRA, Farmers Insurance employees have them fill out a questionnaire to see whether the Roth IRA or the Traditional IRA better suites their needs and income. According to Mr. Martin the Roth IRA is the most commonly used. The reason for this was thought to be that the money from the Roth IRA is more accessible than the Traditional IRA. In addition, options like contributions beyond the age of 70.5 are permitted and distribution is not required at the age of 70.5 helps to make this plan more popular.

INVESTMENT RECOMMENDATIONS In closing, the conclusions drawn from these previous sections points towards the fact that the Roth IRA is more beneficial. q Importance in knowing the differences between the two. q Exposing the positive and negative aspects. q Benefits of the IRA as opposed to other solutions. q The question of which to use. q Value of the Roth IRA.