Brief Summary of IRA and Roth IRA limits in 2011:

Roth Contribution Limits for 2010 and 2011: $5,000

Traditional IRA Contribution Limits for 2010 and 2011: $5,000

Total contribution to your Roth IRA and traditional IRA combined cannot be more than $5,000. (Unless you’re over 50-ish, then you get to make up to an additional $1,000 “catch up” contributions)

You may have heard of a Roth IRA before. I first heard about them in tax class 4 years ago - back then my parents didn’t know what a Roth IRA was. They were just putting their money into their regular 401(k)s. But in 2011, their financial adviser has suggested that they take the opportunity to open a Roth IRA. Why?

Quick Overview of the Roth IRA

A regular IRA lets you contribute pre-tax dollars. So, if you earn $100,000 and contribute $5,000 to your IRA, you will only be taxed on $95,000 that year. But when you withdraw your money at retirement, you’ll pay tax on it then.

A Roth IRA is just the opposite, you pay tax on the dollars now, but can take out the money tax-free in the future.

IRA - no tax now, tax later. Roth IRA - tax now, tax-free later.

If your tax rate is LOWER and you will pay HIGHER taxes when you withdraw money, the Roth IRA is the way to go.

And guess what? Taxes are low right now. And thanks to Obama’s extension of the current tax rates, they will stay low through 2011. I’m guessing that 40 years from now when I’m getting close to retiring, there’s a good chance that the tax rates will be higher across the board.

So for 2011, I will be increasing my contribution to my Roth IRA, rather than increasing my contribution to my 401(k). (Our employer contribution is set - not determined by how much we contribute, so I could drop to zero if I wanted.)

Feel free to comment if you disagree with this reasoning! What are your thoughts?

More on IRA Contribution Limits in 2011

In case you were wondering… .

Your Roth IRA and traditional IRA contribution limits combine. So, if you put $2,000 towards your Roth IRA in 2011, you can only put $3,000 towards your traditional IRA.

Your 401(k) and IRA contribution limits are separate. The 401(k) contribution limit for 2010 and 2011 is $16,500.