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Ask The Experts: Roth IRA vs. Traditional IRA

Hi Carmen, Just like to thank you for the information you gave the other day about the Cobra benefits. Until now I was unable to afford COBRA for my family. I will definitely call my admin in the morning about this. I was laid-off this past January, and with unemployment, I have no way to pay for COBRA and the house.

I also had a question: what is the difference between a Roth IRA and a Traditional IRA? I have my 401(K) sitting there losing money, so I want to place it somewhere. Thanks again for all the help! -Brian, CA

Brian, I am so sorry about your job loss. But you should be very encouraged by the fact that you're taking control of your money and planning ahead. A Roth IRA is an IRA funded with post-tax dollars, meaning, you put money into it that's already been taxed through your paycheck. It then grows tax-free and you can withdraw as well, tax-free. However, there is still an income-cap on who can have a Roth ($101,000 for individuals, $159,000 for couples), and it's not tax-deductible. A traditional IRA, however, is tax deductible and though your earnings grow tax-free, you will pay taxes when you withdraw in retirement.

If you fall under the income-caps of the Roth, it's your better bet in terms of allowing what you invest to work harder and not be taxed. Head to IRS.gov for more information and head to dinkytown.net for 401(k)/IRA conversion calculators. There is a difference in terms of what you'll have to pay in taxes to convert your 401(k) to a Roth or a traditional IRA so check out the math. Good luck!

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Carmen Wong Ulrich is the host of On The Money