Knowing what type of individual retirement account (IRA) you have is important, both from a tax planning perspective and from a retirement saving perspective. Both traditional and Roth IRAs have their advantages, and knowing which one you have allows you to make smart choices with your retirement funds going forward.
You should receive a trade confirmation each time you make a purchase or complete a trade within your IRA. That trade confirmation lists the account number for the IRA, but it should also list the type of account you have. For instance, the top of your trade confirmation might list account number 123456-789, followed by the words "Roth IRA." Check the confirmation statement carefully, because the type of IRA may be listed in a different place depending on which brokerage firm or mutual fund company you use.
Annual Contribution Summary
The administrator of your IRA should send you an annual contribution summary each year. This contribution summary lists the amount you put into your traditional or Roth IRA as well as the dates you made those contributions. If you contributed some money to a traditional IRA and some to a Roth, that breakout will be listed on the contribution summary. If you contributed money to several different IRAs, you should receive a year-end summary for each one of those accounts.
If you determine you have a traditional IRA, you can take a tax deduction for the amount you put into the account. Keep a copy of your contribution summary and use that information when you file your taxes. Contributing to a traditional IRA can lower your taxable income, thereby lowering your tax liability and making it easier to save. The money you put into the traditional IRA grows on a tax-deferred basis, and you only pay taxes on the money when you start taking it out in retirement.
If your contribution summary and trade confirmation indicate you have a Roth IRA, you are not entitled to a deduction when you file your taxes. You can, however, enjoy tax-free withdrawals from your account when you retire. Over the long term, these tax-free withdrawals can be more valuable than the up-front tax deduction, especially if tax rates go up in the years before you plan to retire.