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What is the difference between a Roth IRA and traditional IRA? Which one is tax deductible?

You can deduct a portion of your traditional IRA contribution as an adjustment to income. The amount you can deduct is based on the tax year (For example: $4000 for those under 50 and $5000 for those 50 and over in 2007). A contribution can be made to a Roth IRA, but it is non-deductible. Withdrawals can be made from a traditional IRA once the person reaches the age of 59 ½. If you make any withdrawals before the age limit, you will be taxed 10% of the distribution amount. With a traditional IRA, you must begin to withdraw by the age of 70 ½, opposed to a Roth IRA, where you can continue to contribute to after the age of 70 ½.

All accumulated interest, dividends, and capital gains on a traditional IRA are tax-deferred until the money is withdrawn. All accumulated interest, dividends, and capital gains on a Roth IRA are tax-free if you meet certain requirements. Other conditions may apply. For more details, refer to publication 590 from the IRS.


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