It is tax time once again and no matter how much you hate taxes you should know about the tax advantages of IRA’s. Contributions to IRA’s can help you in many different ways at tax time. They can lower your taxable income dollar for dollar to reduce your tax burden, or even increase your refund. I will compare Traditional IRA’s with Roth IRA’s to show you the benefits of each. Everyone that is able should be putting money away into an IRA. The contribution limit per year is $5500.
Traditional IRA Summary- A Traditional IRA allows you to take the tax advantage in the year that you make contributions to the account. This type of IRA is used by people who are looking for tax deductions.
Pro’s
- – You get to write off your contributions you make each tax year from your Income.
- – If you are not covered by a retirement plan at work, the income limit does not exist. Meaning you can write off contributions no matter how much you make.
Con’s
- – When you take the money out in retirement, you pay the full taxes on not only the money you put in, but the growth as well. (Assuming there is growth)
- – You are required to take the money out and pay taxes beginning at age 70 1/2, this is called a Required Minimum Distribution.
- – If you have a retirement plan at your work, you cannot write off contributions if your Adjusted Gross Income is more than $116,000 (Married Filing Jointly).
Roth IRA Summary- A Roth IRA allows you no advantage in the year of the contribution, but the money you take out in retirement or after death is completely tax free. It is used by people with lower current tax rates and by those wanting tax free money in retirement or as an inheritance for their children/spouse.
Pro’s
- – You get all of your money that you contributed plus all the growth of the account completely tax free after the age of 59 1/2.
- – If you die, the money goes tax free to your beneficiaries.
- – You have the option of withdrawing money, up to the total of all your contributions made, tax free at any age.
Con’s
- – Your contributions do not lower your Adjusted Gross Income in the year contributed.
- – If you make more than $191,000 as married filing jointly you cannot contribute to a Roth IRA. ($129,000 for single or head of household)
Things to Consider
- – You can open as many Roth IRA’s and Traditional IRA’s as you want, but that may not be in your best interest.
- – If your income is below $36,000 (Married Filing Jointly) then you probably qualify for the Retirement Savings Credit, which gives you up to 50% of your total contributions in the form of a tax credit on top of any other tax benefit you would already receive.
- – If you are married and your spouse is not working, you can contribute up to $5500 to an account for each of you for a total of $11,000 of tax advantaged investments for the year.
- – If you believe your current tax bracket is significantly higher than it will be when you take the money out, then you should probably consider a traditional IRA.
The most important part of the decision should be your goals and priorities. A Roth IRA will give you more long term assurance of tax free wealth, while a traditional IRA will help you to dodge big tax bills in the short term. If you need to open up an IRA or Roth IRA this tax season, get in contact with us and we can help you out.
By Jimmy Hancock
Reference
IRS. “Retirement Topics – IRA Contribution Limits.” Retirement Topics – IRA Contribution Limits. IRS, 18 Feb. 2014. Web. 03 Aug. 2014. <http://www.irs.gov/Retirement-Plans/Plan-Participant%2C-Employee/Retirement-Topics-IRA-Contribution-Limits>.