Use this article as a basis to explain the information to your clients. Feel free to copy and edit as you see fit.

IRAs are special brokerage accounts designed to allow individuals to save money for their retirement and manage their portfolios.  There are two types of IRAs: Traditional or Roth. There are also two types of contributions to an IRA: rollover contributions and direct contributions. These contributions can either be tax-deferred or not. This can get a bit complex since taxes and the IRS are involved, so let’s go over the similarities and differences.

To begin with, rollover contributions come from an investor’s 401(k), 403(b), or other retirement plan.  There isn’t technically such a thing as a Rollover IRA; it’s actually a type of tax-free distribution from one retirement plan to another. [1] However many brokerage houses will designate new IRAs that are created from a rollover so that the IRS knows that the new account contains assets that were transferred from another 401k, 403b, IRA or other qualified plan. Because rollover contributions come from an existing tax-advantaged retirement plan, the rollover contribution isn’t typically taxed or subject to the annual limitations of direct contributions.

So don’t let the word “Rollover” throw you.  When you roll over, you can choose to roll over into one of the two types of IRAs: Traditional IRAs or Roth IRAs. (Usually, an investor will roll over into a Traditional IRA because 401(k) and 403(b) plans are tax deferred, not tax exempt, a distinction we’ll get into more detail below.)

The two types of IRAs – Traditional IRAs and Roth IRAs – differ on income limits, age limits, and the Required Minimum Distribution (RMD).

The main difference between a Traditional IRA and a Roth IRA is how they’re taxed. (This is the tax deferred versus tax exempt distinction we referred to above.) If you choose a Traditional IRA, you don’t pay taxes on your contributions until you make a withdrawal, usually in retirement. This make a Traditional IRA a tax deferred account.  For example, if you contribute $5,000 of your $80,000 a year salary to a Traditional IRA, you only pay taxes on $75,000 of your salary, deferring paying taxes on that $5,000 contribution until later. This means that when you retire and withdraw funds from your Traditional IRA, every dollar is taxed. (There are limited exceptions; see IRS form 8606 for more info. [2])

Contribute the same $5,000 to a Roth IRA, on the other hand, and you still pay taxes on your whole $80,000 in income for the year. However, when you withdraw money from your Roth IRA, there are no taxes imposed. That means no tax on the $5,000 contribution and no tax on whatever your investment gains are over time. This makes a Roth IRA tax exempt.

Just as contributions to an IRA are treated differently by the IRS, earnings in an IRA are also treated differently depending if the account is a Traditional IRA or an Roth IRA. Withdrawals from a Traditional IRA after the approved age of 59 1/2 are taxed as regular income, whereas withdrawals from a Roth IRA after that age are not taxed at all. To say it another way: Traditional IRAs are tax-deferred in that you pay tax after you access the money; Roth IRAs are tax-exempt in that you pay taxes now, but don’t pay them when you access the money later, as long as the money has sat in the account for five consecutive tax years.

In a Traditional IRA, your money becomes subject to an RMD in the year you turn 70 ½. That means that after you turn 70 ½ you are required by law to start pulling money out of the Traditional IRA. In addition, you cannot start a new Traditional IRA account after 70 ½.

One major benefit of a Traditional IRA is that there is no income limit on contributions. Even if you make millions of dollars a year, you are still allowed to sock away contributions to a Traditional IRA and the earnings on that money will be tax deferred until withdrawal. However, your ability to deduct the contribution is phased out based on income and you or your spouse’s eligibility for a retirement plan at work.

Roth IRAs do not have any age limits or a Required Minimum Distribution. You can open a new Roth IRA at age 85 if you want, and start saving for your “retirement.” However, Roth IRAs have a very major restriction: you can’t contribute any money to a Roth IRA if your Adjusted Gross Income is above a certain amount. For single tax filers, that upper limit is $105,000 a year. For married people filing jointly, the upper limit is $167,000 as of tax year 2010.

You can rollover from a Traditional IRA to a Roth IRA by paying taxes on the funds in your Traditional IRA to equate their tax status with the funds in your Roth IRA. Converting from a Roth IRA to a Traditional IRA is generally not done—you’ve already paid taxes on your funds in your Roth IRA, why pay them again in retirement? Similarly, you can rollover a Traditional 401(k) into a Traditional IRA without paying taxes or a Roth IRA with paying taxes, but it would not make sense to rollover a Roth 401(k) into a Traditional IRA.  For 2010, there are no income limits or restrictions on rolling over a Traditional IRA into a Roth IRA as long as you pay taxes on the “contribution”.

If you and your spouse are not covered by a plan at work there are no income limits on deductibility. If you’re covered by a plan at work and are single making more than $65,000 or married making more than $109,000, you can’t deduct the contributions. There are few other special cases as well. The gory details are available on the IRS’ website. [3] [1] http://www.irs.gov/retirement/participant/article/0,,id=211527,00.html