It’s not too late to make a Traditional or ROTH IRA contribution for 2011. IRA contributions can be made any time during the tax year and up to the tax filing due date for 2011, which is April 17, 2012. Normally the due date is April 15th, but this year the 15th falls on a Sunday and the 16th is a holiday.

Should you contribute to a Traditional IRA or a ROTH IRA?  The main difference between the two is the timing of your possible tax benefits. 

With a Traditional IRA, you may be entitled to a deduction in the year of your contribution; however, your Traditional IRA withdrawals are taxable in the year of withdrawal. At age 70½ you are required to make distributions from your Traditional IRA. 

The ROTH IRA works in the opposite manner. With the ROTH IRA, there is no deduction for your contribution; however, your qualified ROTH IRA withdrawals are not taxable. The ROTH IRA has no mandatory distribution requirement during your lifetime. 

So which is better for you? First, determine whether you can contribute to a ROTH IRA. For 2011, you cannot make a ROTH contribution if your modified adjusted gross income (MAGI) on your tax return is $179,000 or more for a joint filing status and $122,000 or more for single or head of household. The limit for married filing separately is $122,000 as well, if you did not live with your spouse during the tax year. If you did live with your spouse and you file separately, the MAGI limit is only $10,000.

TIP:  You may be able to get around these income rules if your 401(k) plan offers a ROTH 401(k) option.

Second, if you or your spouse is covered by an employer retirement plan, some, or all, of your Traditional IRA contribution may not be deductible. Your tax preparer should be able to help you determine if your deduction is limited. If your deduction is limited, you can always make a non-deductible Traditional IRA contribution, but you might consider a ROTH IRA contribution instead. 

Third, you should determine your current tax bracket and estimate your tax bracket during retirement. For simplicity and to make a “rule of thumb” decision, let’s look at your tax rate in retirement as lower, the same, or higher than your current tax rate. If you will likely have a lower tax rate in retirement, that means you have a higher tax rate today. A higher tax rate today might mean that a deduction today would be more important than a tax benefit in the future. Therefore, if a deduction is more important today, you should consider a Traditional IRA contribution. If you are likely to be in a higher bracket in retirement, then a ROTH IRA contribution could be better. If your tax rate will be the same, and taxes are your primary consideration, then you could make either a Traditional or ROTH IRA contribution. 

Most importantly, save and invest for retirement. Talk with your tax preparer or Retirement Advisor about the different plans available to you.

Bil Sadler is a Retirement Advisor in Albany, GA. For more information visit www.sadlerretirement.com

Disclosure: Bil Sadler, CFA, CPA, CFP®, Securities offered through H.D. Vest Investment ServicesSM, Member SIPC, Advisory services offered through H.D. Vest Advisory ServicesSM The views and opinions presented in this article are those of Bil Sadler and not of H.D. Vest Financial Services® or its subsidiaries.