My Investing Notebook :: Learning from the pros; making decisions on my own. ::

Note: Even if it is 2004, you can still open an IRA account and contribute for year 2003. You can do it until April 15.

Which one is better?

The maximum amount that you can contribute is the same for both — $3,000 for 2003 (plus $500 if you are 50 or over) or your taxable compensation per year, whichever is less. So the contribution limit is not a factor.

And both contributions come from post-tax dollars. So you have already paid taxes on this money.

But when you draw money from a traditional IRA, you are taxed on the earnings on the nondeductible contributions (though you are not taxed on the withdrawal of the contributions, because you already paid taxes on those). Roth earnings, if you meet certain conditions for distributions, such as being over 59-1/2, and having the account for at least five years — are not taxed.

This can make a very big difference over the years. If you are going to be leaving the money in the account to earn interest or dividends for a long time, the Roth IRA may be more attractive.

Also, if you expect to be in a higher tax bracket when you plan to draw money out of your IRA than when you originally contribute, the Roth IRA will probably work better for you.