When you’re deciding between a traditional tax-deductible IRA and a Roth IRA, remember that the government gives you only two choices: pay income taxes now, or pay them later.

The key differences
If your earned income qualifies you for a tax-deductible traditional IRA, you can reduce your income taxes by deducting your annual contributions—so you can avoid the tax collector up front.

However, when you start taking withdrawals, the IRS will have its day, as you’ll pay taxes on every tax-deferred penny you withdraw. There also may be penalties if you take withdrawals before age 59½.

With a Roth IRA, you pay income taxes up front (that is, your contributions are not tax-deductible). However, your withdrawals are tax-free (once you have had any Roth IRA for more than five years, and have reached age 59 ½ or experienced another qualifying event).

Which one makes sense for you?
“If you're eligible for a Roth IRA and a tax-deductible traditional IRA, the questions is: Would you rather pay the taxes now and look forward to tax-free distributions?” says Karen Dudley, regional sales consultant for Thrivent Financial for Lutherans. "Or does the current tax deduction with taxable distributions in retirement suit you better?"

Dudley notes that while taxes are a key consideration, you should also think about when you might need to start withdrawing your money. “For those people planning to work late into retirement and fund their IRAs during that time, a Roth may be the right choice,” she says.

That’s because with a traditional IRA, you can only contribute until age 70½, at which time you must start taking required minimum distributions. “With a Roth IRA, you can contribute throughout your life [providing you or your spouse have earned income equal to your contribution] and distributions can be delayed indefinitely,” according to Dudley.

She is quick to emphasize that regardless of the type of IRA you choose, the important thing is to be disciplined, making contributions as a regular habit.

Contribution limits
Limits for both types of IRAs will continue to increase. Provided you have the requisite earned income, savers younger than age 50 will be able to stash $4,000 per year in either type of plan for 2006 and 2007; those 50 and over can contribute up to $5,000.

“The earlier you start putting the money aside in an IRA, the more likely you are to retire with confidence,” Dudley says. “And, if between now and retirement, you have a special need—like buying a first home or paying for college—you could use the money and get a break on the early withdrawal penalty. What’s not to like?”

Learn more about eligibility requirements, or contact your Thrivent Financial representative for help deciding which IRA is right for you.