The best IRA? It depends

Which IRA is best for you — the Roth or the traditional variety? Or should you pass on both and choose an ordinary taxable investment?

With the April 17 tax-filing deadline bearing down, millions of taxpayers are trying to decide whether to contribute to an IRA for the 2005 tax year.

This grace period is fortunate because you need some of the numbers calculated in doing your return to know if you’re eligible for a Roth or can get a tax deduction on money put into a traditional IRA.

For 2005, the total contribution allowed for all your IRAs, regardless of whether you use one account or more, is $4,000, plus $500 for people who were 50 or older by the end of the year.

Briefly, these are the options:

The traditional IRA. Investments returns are tax-deferred, meaning there’s no annual tax on interest, dividends or capital gains. Money that otherwise would be used for paying taxes can, thus, stay invested, boosting gains from compounding. Withdrawals must begin in the year you turn 70 1/2 .

Because of this, many find the traditional IRA an unappealing option unless one is eligible for a tax deduction on contributions.

If you didn’t have a retirement plan at work last year, the contribution is deductible. If you did, rules on deductibility are complicated.

For example, a married couple filing a joint return can deduct all contributions if its modified adjusted gross income (figured on the return) was $70,000 or less. The figure is $50,000 for a single person.

Any good tax-preparation guide will walk you through these and other rules. I like the Ernst & Young Tax Guide. Also, most brokerages, banks and mutual fund companies have IRA guides on paper and online.

The Roth. These are simpler. There’s no tax deduction on contributions for anyone. But there also is no annual tax on gains — or any tax on withdrawals. Consequences of withdrawals before 59 1/2 are less severe than with traditional IRAs, and you do not have to begin taking money out at 70 1/2 .

Unfortunately, not everyone can have a Roth. To qualify for full deductions, single people must have incomes below $95,000. For married couples filing joint returns, the figure is $150,000.

The taxable account. This covers any non-IRA investment that is subject to annual taxes as well as taxes on withdrawals. While that sounds bad, it needn’t be, if you chose an investment that offers the bulk of its returns through long-term capital gains — the difference between the sales price and purchase price on investments held for longer than 12 months.

The maximum 15 percent rate on long-term capital gains won’t be triggered until the investment is sold. This means you can postpone the tax for decades, just as you would with a traditional IRA, but then pay tax at a lower rate than with a traditional IRA. (Interest, dividends and short-term capital gains will be taxed each year.)

Taxable accounts are more flexible than IRAs because there is no penalty for taking money out before 59 1/2 , and there’s no requirement that you start withdrawals at any point.

As a rule of thumb, a traditional IRA might be the best choice if you can deduct your contribution, assuming the money saved with the deduction is invested as well, and that you won’t be in a higher tax bracket in retirement than you are now.

Next would be the Roth, though it should come first if you think your tax rate will be high in retirement, or if you like knowing you don’t have to worry about future tax rates. Then comes the taxable account emphasizing long-term capital gains. The traditional IRA with no deduction on contributions brings up the rear.

But any decision is a gamble because we don’t know how the tax laws and rates will change.

Good advice: See what looks best for you by playing with one of the many IRA-comparison calculators offered online, such as the ones at http://www.dinkytown.net/.