Having a healthy nest egg for retirement can be boiled down to three factors: how much money you set aside for retirement, how much growth your investment generates, and how long you have the money invested.

While earning significant growth on your assets is needed, it is not easy to control because you can’t control the stock market. Having a long time to invest is easy when you are younger, but progressively that factor gets worse as the timeline gets smaller; plus you can’t really control the passage of time.

The easiest factor to control by far is how much money you invest for retirement. You can decide today to save more money for retirement in an account such as a Traditional or Roth IRA. But today I’m going to show you that while a Traditional IRA is nice, a Roth IRA allows you set aside more money for retirement even though the contribution limits are the same. How is that possible? It all comes down to Roth IRA rules. Read on.

Traditional and Roth IRA Contribution Limits

In 2011, the contribution limit for both types of IRAs is $5,000 if you are not using catch up contributions. In future years, contribution limits will be tied to inflation increases. For now, you are limited to a flat $5,000 this year.

The Impact of Taxes on Your Contribution Limit

The difference between a Traditional IRA and Roth IRA is how your contributions are taxed. With a Traditional IRA you get a tax break by contributing the $5,000 this year. You do not pay taxes on that $5,000 until you pull it out of the IRA in retirement.

When you look at the Roth IRA side of things, you are contributing $5,000 in after tax dollars. You pay taxes today and you never pay income tax on your contributions.

Many people believe that getting a tax deduction today with a Traditional IRA contribution allows you to set aside more money for retirement because you aren’t paying taxes on the contribution today.

This is actually the opposite of the truth. A Roth IRA lets you save more of your income for retirement. Here’s the math. We’ll assume you are in the 25% tax bracket so any pre-tax contributions will save you 25%, and any post-tax contributions will be made with dollars that have been reduced by the tax.

• To contribute $5,000 to a Traditional IRA, the contribution comes from pre-tax income. To contribute $5,000 you need to simply earn $5,000.
• To contribute $5,000 to a Roth IRA, you have already paid 25% tax on the amount of the contribution. That means you needed $6,666.67 of pre-tax income to get to $5,000 in post-tax contribution. You have set aside more of your income for retirement with a Roth IRA.

A different way of looking at the math:

• A $5,000 pre-tax contribution into a Traditional IRA that never grows will be worth $3,750 after the 25% income tax is applied when you withdraw the money from the IRA.
• A $5,000 Roth IRA contribution that never grows will be worth $5,000 when you withdraw the money from the Roth IRA because you have already paid tax on it.

The bottom line is you can save more of your income for retirement by using a Roth IRA.

Start saving for retirement now – there is no time like the present. Check to see if your income falls below the Roth IRA income limits. If you are eligible, there isn’t a better type of retirement account to open. Take control of your future and open a Roth IRA today.

This article is by RothIRA.com’s Senior Editor, Kevin Mulligan. He is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. Kevin’s been utilizing a Roth IRA to save for retirement since 2008. You can follow him @RothIRAdotcom.

Whether you are self-employed, or whether you work for “the man”, an IRA can be one way to increase your retirement nest egg. When you go to set up an IRA, though, you will need to decide whether you want a traditional IRA, or whether you want to go with a Roth. You will need to consider your options, and think about the pros and cons of each type of IRA. Below, this helpful infographic from CreditLoan.com offers a look at the key differences between the traditional IRA and the Roth IRA, answers common questions about IRAs, and provides a helpful flow chart that can help you determine which course of action is likely to be best for you: [CLICK IMAGE FOR LARGER VIEW]

Traditional IRA vs. Roth IRA: Click For Larger Image

What to Consider When Choosing

One of the most important things to consider in your decision — once you’ve established that you are eligible for either type of IRA — is what you think your tax bracket will be. If you think you will be in a higher tax bracket, it can be a good idea to consider a Roth IRA, since your withdrawals won’t be taxed. However, if you expect your tax bracket to be lower, a traditional IRA can be helpful since you get your deduction now, and when you do pay taxes on withdrawals, it will be at a lower rate. Another good idea is to consider the withdrawal penalties. While no one invests in a retirement account planning on taking early withdrawals, you never know when a financial emergency is going to arise.

Advantages of Both IRA’s

In either case, there are advantages. Remember, thought, that IRA contributions are somewhat low as compared to those allowed in 401k plans and Roth 401k plans. You can only contribute up to $5,000 ($6,000 if you are at least 50) in 2010, so if you don’t have a lot of time to let your money grow, it may not grow fast enough. The longer you have for your money to grow, the more it can work for you, and the bigger your nest egg has the potential to be. If you are concerned about the time limit, you can check into 401k plans to see if they might help you.

Beware The Risks

Just remember that these retirement accounts consist of investments, and that it is possible to lose money. You should also be prepared with a diverse portfolio that can help you sustain the blow if a market crash happens just before (or during) your retirement. These types of investments do not come with a guarantee, and you can find yourself in a tough position. A backup plan is a wise thing to consider when planning your retirement. Think about what you might do if your retirement investment accounts tank just ahead of retirement.

Of course, it is important to remember that each person is individual, and this infographic may not provide enough information for each person to make the best decision. You can speak with a financial professional to help you work out a retirement plan, and help you evaluate which type of IRA is best for you.

Many of the posts on this blog have revolved around the Roth IRA account. With great reason, since it’s one of, if not, the best saving tool created for retirement planning. As good as opening a Roth account is, the Traditional IRA still has its place. To explain some of the rules of the Traditional IRA Account, I have solicited the expertise of JoeTaxpayer who authors the self titled blog. Here’s what Joe had to say….

For all the talk about 401(k) accounts, and Roth IRA conversions, etc, the traditional IRA (individual retirement arrangement) shouldn’t be overlooked. If you are fortunate to work at a company that offers a match on your 401(k) deposits, don’t walk away from that free money. I would suggest, however that for money beyond the match, an IRA may be the better choice.

1. Contribution Limits for 2010-2011

If you are under the age of 50, the maximum amount of money you are allowed to contribute to a Traditional IRA in 2010 is $5,000 (which is the same level as 2009). You can contribute this amount regardless of whether you are eligible to claim a deduction for using a Traditional IRA. But if you are over the age of 50, the IRS allows an additional contribution, often referred to as a “catch-up contribution,” up to $1,000. So if you already celebrated the big “5-0″, you can contribute a total of $6,000 to a Traditional IRA.

Update: The Traditional IRA Limits have remained at $5,000 and $6,000 for the 2011 tax year.

2. Traditional IRA Account Phaseout Limits

Now, let’s review the traditional IRA phaseout limits, the income levels at which you are allowed to take the deduction for an IRA. Note these limits kick in only if you have a retirement plan (401(k), 403(b), etc, but not a defined benefit plan) at work, whether or not you actually contribute to it. If you are single, the 2009 phaseout is $55,000-$65,000, for married filing joint, $89,000-$109,000. Below the lower figure in that range, you may deduct the full amount $5,000 if you are under 50, $6000 if you turned 50 in or before 2009. The amount you may deduct decreases linearly until the higher number of that range is reached. If you find you are just beyond these ranges, you’ll qualify to put money you can’t deduct into a Roth, instead of just putting after-tax money into the traditional IRA.

Editor’s note:  I’ve included a few charts that will help you with the computations.  Please note that in Chart 2 that the limits do increase.

2009 Phaseout Limits

Next, I’ll discuss the potential advantages and disadvantages of using the IRA in favor of the (non-matched) 401(k).

3. 401k vs. Traditional IRA

The 401(k) can excel in two regards. If you separate from the company at 55 or older, you can take withdrawals penalty-free. Of course, taxes are still due, but no penalty, as with an early IRA withdrawal. The 401(k) also offers the ability to borrow from the account. This can be a mixed blessing, and potentially risky move, but an option nonetheless.

IRA advantages start with low cost and flexibility. The costs within a 401(k) account are often tough to understand and often multi-layered, a potential combination of management fees as well as expenses for the underlying investment. For small plans, fees can easily run above 1.5% and even over 2%. Considering that your goal is to save money pre-tax at one rate and upon withdrawal, pay taxes at a lower rate. This advantage can disappear altogether in a decade with fees approaching 2% per year. With few limitations on what you may invest in within an IRA, you are free to choose from investments with very low expenses, many index based investments offer fees as low as .10%, a fraction of the average 401(k) expense.

A traditional IRA offers a penalty-free, but not tax-free withdrawal of up to $10,000 per person for the first time purchase of a new home. ‘New’ to the IRS just means that you didn’t own your principal residence during the prior two years, not that you never owned a home. You can also use this penalty-free withdrawal to help a child, grandchild, or parent.

A similar penalty-free withdrawal is also allowed for qualified higher education expenses for you, your children or grandchildren. Expenses include tuition, fees, room and board, books and supplies.

There is also an exception for withdrawal made to cover medical expenses exceeding 7.5% of your adjusted gross income.

If you are fortunate enough to be able to retire before age 59-1/2, you have an option called a Section 72(t) withdrawal. You are permitted to take withdrawals from your IRA that follows a “series of substantially equal periodic payments (SOSEPP)”. Once you begin this process, you must continue this exact withdrawal amount for 5 years or until age 59-1/2, whichever comes later. The choices for calculating that periodic payment are minimum distribution, amortization, and annuitization. Further details on this is available at the IRS web site.

4. Beneficiary Check

When opening up an IRA, or if you already have one, be sure to specify your beneficiaries. An IRA that doesn’t not have a designated beneficiary will become part of your estate and regardless of who inherits it, has limited options to continue its tax-deferred status. By specifying a beneficiary, and ideally a contingent beneficiary, your heir(s) can take withdrawals over their remaining lifetimes.

The IRA has been around since 1974 and with good reason, it deserves a place in your finance as the core of your long term retirement planning.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This post is featured in the Best of Money Carnival.

Photo by Jason York Photography