Traditional or Roth

• There are two options available to consumers when contributing to IRAs. A traditional reduces income, taking a tax deduction for the contribution; a Roth IRA doesn't. The traditional pays income taxes when funds are taken out while the Roth enjoys tax-free distributions. If you are covered by a government retirement plan such as the Federal Employees Retirement Savings plan, you have income restrictions stating how much you can deduct when contributing to a traditional IRA, depending on your income. Roth IRAs have income restrictions but are not affected by whether you have an employer's plan or not.
  
  

Traditional IRA Income Limits

• Employees covered by an employer plan have lower income restrictions than those not covered by a plan at all. The 2011 income limits are listed in phaseout ranges broken down into household tax filing status. Those falling under the income range can deduct the entire contribution. Those falling above the range cannot deduct anything. Those within the range have levels of deductibility. When filing as a single person or head of household, the phaseout range is $56,000 to $66,000. When filing as a married couple filing joint returns, the phaseout range is $90,000 to $110,000.
  
  

Roth IRA Income Limits

• The Roth IRA has phaseout ranges strictly determined by household income and filing status. There is not a separate phaseout range if you are covered by an employer plan. Falling under the range allows a full contribution, while being above it allows no contribution. Partial contributions are allowed within the range. Single or head of household filers have a range of $107,000 to $122,000. Married couples filing joint tax returns have a range of $169,000 to $179,000.
  
  

Your Options

• With such low phaseout limits for those covered by an employer plan, the Roth tax-free option becomes very attractive to supplement retirement savings. Both a traditional and a Roth allow $5,000 in max contributions. The difference is whether you can or want to deduct the contribution. Speak with a tax adviser to review the best scenario for your personal situation. The good news is that even if you don't qualify for a fully deductible traditional IRA or a Roth, you can still make the full $5,000, with the earnings growing tax-deferred in a nondeductible traditional IRA.