Last week I reviewed the traps and missteps of managing an Individual Retirement Account. Some of those rules do not apply to Roth IRAs, which differ by:

- Required withdrawals: Unlike traditional IRAs, Roth IRAs do not require minimum distributions once the owner reaches age 70 ½. This makes them appropriate for owners interested in passing on more to beneficiaries.

Tax-free withdrawals: Because Roths do not allow contributors to take a tax deduction, withdrawals are tax-free. This includes both contributions and capital gains once the owner reaches 59 ½.

However, withdrawals of contributions, but not gains, can be made at any age without a penalty as long as the account has been open at least five years.

Contribution limits: Married owners who make more than $166,000 adjusted gross income a year, as claimed on a joint tax return, or single owners who make more than $114,000, are not eligible to contribute to a Roth IRA.

These income limits are higher than those of traditional IRAs, so savers who are over the traditional limits can still get tax-free earnings with a Roth.

You can contribute to a Roth at any age. With a traditional, no investments are permitted after age 70½.

These differences cause many savers to be confused about which one to pick. Financial experts argue both ways.

Investment adviser Roland Manarin of Omaha, Neb., is on a national campaign to promote traditional IRAs.

He says delaying taxes now is best because you keep more of your money, and the more you have, the more it can grow.

“In a traditional IRA, the money that would normally go to pay taxes is instead working to produce more compounding earnings year after year until you finally do have to pay the tax,” he said. “Over the long term, this puts you way ahead of anyone that uses a Roth.”

He also warns the government could change Roth rules and take away the tax-free benefit.

“There was a time when the government said they would never tax Social Security, which they now do today,” he said in a news release.

On the other hand, Tom Holmes of Holmes Financial Group in Woodland Park thinks the future tax benefit makes Roth IRAs the better option over the current tax benefits.

Prospects are greater for higher tax rates, so making withdrawals in the future from a traditional IRA would mean paying more taxes, he said. The Roth’s tax-free withdrawals immunize against those higher taxes.

“As tax rates go up, you avoid those taxes later,” he said.

The other strategy is to use both, said Allan Roth, a certified financial planner in Colorado Springs. By having a Roth and a traditional IRA, you diversify against the effect of future tax rates. If taxes go up, your Roth assets win; if taxes go down, your traditional assets win.

MORE ON TRADITIONALS

Two readers e-mailed me about last week’s column to share two rules used in special circumstances for early withdrawals from traditional IRAs:

- If you inherit an IRA and are under 59 ½, you can take the money without the 10 percent penalty, just the tax. You have up to five years after the death to take out all the money, which helps spread out the taxes over five years if you take part out each year.

- You can take penalty-free withdrawals if you arrange to receive annual payments from the IRA of the same amount for five years (payment determined by life expectancy at withdrawal age) or lasting until you reach 59 ½. This can get complicated, so it’s wise to consult a financial adviser if this need arises.

Also read IRS Publication 590 for details on IRA rules.

Contact the writer: dan.serra@gazette.com