Carrie Schwab Pomerantz

Dear Carrie: What's the difference between an IRA and a non-IRA account? Can I put money into either account now that I'm not working and retired? -- A Reader

Dear Reader: Transitioning from working to retirement presents new challenges that require you to look at your saving and spending decisions in a whole new way. Having the right accounts for your money is an important consideration, so you're wise to be asking this question now.

There are distinct differences between IRAs and regular brokerage accounts. While you can buy and sell securities (stocks, bonds and fixed income investments) and hold cash in either, there are significant differences in how your earnings are taxed. Plus, there are differences regarding who can put money into what account and how much. Understanding how these accounts differ will help you make smarter decisions about saving, investing and spending during your retirement years.


An IRA is a (SET ITAL) tax-advantaged (END ITAL) account, designed to allow retirement savings to grow tax-deferred. There are two basic types of IRAs -- traditional and Roth. While both offer tax-deferred earnings, there are distinctions between the two that also have to do with taxes:

--Contributions to a traditional IRA are tax-deductible depending on your income and whether you participate in an employer-sponsored plan such as a 401(k). Earnings grow tax-free, and you pay ordinary income taxes when you make a withdrawal.

--With a Roth, there's no up-front tax deduction for a contribution, but you can withdraw earnings income tax free at age 59 1/2 if you've held the Roth for five years.

By contrast, with a (SET ITAL) taxable (END ITAL) brokerage account, you get no tax deductions, and you pay capital gains taxes on any gains you realize when you sell a security. These gains are considered either short-term (investments you've held for one year or less) or long-term (investments you've held more than one year).

You pay ordinary income tax on short-term gains, currently up to 35 percent. But on long-term gains, you pay the federal long-term capital gains rate, currently 15 percent. If your tax bracket is 15 percent or lower, the tax rate is 0 percent -- at least through 2012.


Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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