Both will allow you to accumulate wealth without paying taxes, but with the traditional IRA you will get a tax bill for the profits and contributions when deductions are made.

The Roth IRA, on the other hand, doesn’t do that. As long as you follow the rules, you never pay taxes on the gains. However, you don’t get a break on your yearly income tax. For this reason, many experts say the Roth may work out to be better.

Let’s say for example, you made $30,000 last year and of that you put $2,000 into a traditional IRA. You would only pay income tax on $28,000. While with a Roth IRA, you would end up paying income tax on the full $30,000 even though $2,000 is in an IRA account.

Both will allow your deposit to grow tax free throughout the years However, when you withdraw the money from a Roth IRA, none of it –not even earnings — will be taxed, provided you meet two rules – the account has been open for at least five tax-years and you are older than age 59 1/2.

With a traditional IRA, when you finally withdraw the money — after age 59 1/2 — you’ll have to pay income tax on whatever earnings the $2,000 have accrued. There is also a 10 percent penalty fee for funds withdrawn before reaching 59 1/2. The good news is there are exemptions such as paying for higher education expenses. Other exemptions include:

• Permanent disability of IRA owner.
• Death of IRA owner.
• Withdrawals are used to pay non-reimbursed medical expenses that exceed 7.5% of adjusted gross income (AGI).
• Withdrawals used to help pay for first-time home purchase.
• Money is used to pay back taxes to the IRS after a levy has been placed against the IRA.
• Withdrawals used to pay medical insurance premium.

The traditional IRA also has penalties for not receiving distributions once you become 70 ½.
You must begin receiving yearly distributions at that age based on your life expectancy, or pay at least a 50 percent penalty on the amount you should have withdrawn. A Roth IRA doesn’t have a mandatory distribution age.

It’s for these reasons most financial experts favor the Roth IRA because in the end, you will be able to draw more money out. It also provides greater flexibility by allowing you, in most cases, to withdraw your principal contributions at any time tax-free, without penalty. First-time homebuyers can also pull out $10,000 in profits penalty free and tax-free if the money has been in the Roth IRA for at least five tax years.

The downside to a Roth IRA is meeting the qualifications for it, especially if you are single. To qualify a single filer must make up to $95,000. It’s a lot better for couples. They are required to make up to $150,000 jointly.

Basically, if you can qualify for a Roth IRA, go for it, but if not a traditional IRA is a good retirement saving tool also.

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A self-employed designation is determined by the IRS.  For tax purposes, anyone who is the sole owner of their trade or business, an independent contractor (this includes freelancers), or a member of a partnership in a small business are classified as self-employed.  As such, there are additional tax forms that need to be filed each year that the business is in operation.

A self-employed person who makes $400 or more in profit during the year, has to declare that income to access taxes.  This also applies to church employees who earn more than $108 and didn’t receive a W-2 reporting form.  The IRS forms will determine what taxes if any need to be paid.

All self-employed persons must file a Schedule SE form in addition to the 1040 form.  The Schedule SE form has a long and a short version.  The form has instructions concerning who needs to fill it out.  This form records the total earnings of the business or trade enterprise, the amount of tax according to IRS calculations, and the tax amount after a fifty percent deduction is applied.

This amount may not be the final tax owed on the profit of the business.  There is another form where people list the profit or loss from their business enterprise.  This form is called a Schedule C.  Any portion of the profit that was funneled back into the business to fund expenses is recorded here on specific lines.

The total profit received into the business is reported here, just like it was recorded on the Schedule SE.  Freelancers and independent contractors may have a business account where they record each payment transaction to determine this amount.  Anyone who has an ongoing contract with you for services will be subject to sending you a 1099 form.  This form details the amount of money paid to you for work done in the tax year.

Home based businesses can use this form to record any expenses for the business use of the home.  This amount is transferred from another form, Form 8829, where the amount of the home deduction is determined.  Information about the use of your vehicle for business use is recorded on the Schedule C form.  Businesses that deal in inventory for their products have room in Part III to list that information and the dollar amounts.

The Schedule C form is useful in determining the amount of taxes that you will pay.  A tax professional will be able to tell you all of the deductions that you are qualified to take against your profits to lower the amount of taxable income.  Exemptions are even better because they lower the amount of taxes to be paid.

For complete instructions on filing a Self-Employed Tax Form consult with your tax preparer or visit www.irs.gov/pub/irs-pdf/i1040sc.pdf

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