A Roth IRA has some important distinctions from a traditional IRA, and, depending on your tax bracket, your retirement needs, and your estate planning goals, a Roth could be a much better option for you. So, what’s the difference between the two types of IRAs?

The Traditional IRA

A traditional IRA is a “tax-deferred” retirement account. This means that contributions are generally tax deductible for the year in which you make them, but when you retire and begin to withdraw money from your account, those distributions are counted as taxable income. And, with a traditional IRA, after you reach age 70 1/2, you’re required to take a minimum distribution each year. The amount of each year’s minimum distribution is linked to your life expectancy.

The Roth IRA

A Roth IRA, on the other hand, is a “tax-free” account. With a Roth, your contributions are not tax deductible, but, after you reach retirement age, any money that’s distributed from the account is completely tax free. This includes the account’s earnings, and the tax-free status of the account extends to your beneficiaries.

The icing on the cake, when it comes to a Roth IRA, is that there’s no requirement that you take annual minimum distributions after you reach age 70 1/2. This makes a Roth IRA a great tool for building an inheritance for your loved ones.

While your beneficiaries enjoy tax-free status on Roth distributions, they don’t escape the requirement to take a minimum distribution from the account each year. This requirement begins when the account passes to your beneficiaries, and the amount is based on life expectancy.

Who Can Contribute to a Roth?

There are income restrictions when it comes to contributing to a Roth IRA, and those restrictions can change on an annual basis. For 2010, if you’re single and earn less than $105,000 per year, or if you’re married and earn less than $167,000, then you can make a full contribution to your Roth IRA. Above these thresholds, the amount you can contribute is slowly phased out, and singles earning more than $120,000 and married couples earning more than $177,000 can’t contribute to a Roth.

For 2011, the income limits are slightly higher. Singles can make a full contribution as long as their income is below $107, 000. The phase-out occurs between $107,000 and $122,000 in annual income, and if you’re single and you earn more than $122,000 you’re ineligible to contribute to a Roth in 2011. If you’re married filing jointly, you can make a full contribution if you earn less than $169,000 in 2011, with contribution eligibility totally phased out if you earn more than $179,000.

Contribution Limits

There’s a limit to how much you can contribute to any IRA on an annual basis. For 2010 and 2011, that limit is $5,000 for those under age 50. If you’re 50 or older, you’re allowed an additional $1,000 “catch up” contribution each year.

Converting to a Roth

What if you have a traditional IRA and want to take advantage of a Roth IRA? You can convert to a Roth if you pay income tax on the balance of your traditional IRA. The income limits that used to apply to Roth conversions were removed beginning in 2010.

If you don’t anticipate the need to use your IRA for retirement income, a Roth conversion could be an excellent estate planning move. For example, if you’re 70 years old and have $300,000 in a traditional IRA, converting to a Roth would eliminate the need for you to take any future distributions from your account. So, if you earn 8% on the funds in your account, and live to age 86, you’ll pass on more than $1 million to your heirs through your Roth IRA. A qualified estate planning attorney can help you coordinate your retirement plan with your estate plan, so that your beneficiaries can get the most from your IRA.