Contributing to an IRA May Provide You Tax BenefitsSubmitted by ProActive Tax Partners on February 16th, 2015
With the tax filing deadline approaching, have you considered contributing to an Individual Retirement Arrangement (IRA)? IRAs are one of the most powerful retirement savings tools available to you. Even if you're contributing to a workplace retirement plan, you may want to consider investing in an IRA. You may be eligible for a full or partial federal tax deduction with a traditional IRA. This can be especially valuable if you are already contributing the maximum to your workplace plan, such as 401(k), 403(b), or 457(b).
The good news is if you’re eligible for a tax deduction, there’s still time to make a contribution for the 2014 tax year. For 2014 and 2015, you can contribute up to $5,500 per year, and up to $6,500 if age 50 and over.1
Two Types of IRAs
Traditional and Roth. The same annual contribution limit applies to both. While you can have both traditional and Roth IRAs, your total annual contribution in one year to all IRAs that you own cannot be more than the annual limit established by the IRS. Earnings in both accounts grow tax-deferred, but there are significant differences between a Traditional IRA and Roth IRA.
Traditional IRAs: For most, Traditional IRAs offer a great way to help lower your taxable income. Almost anyone who earns taxable compensation can open a traditional IRA. Contributions may be tax-deductible as described above, but earnings and the tax-deductible amounts are taxed when withdrawn. You cannot make contributions after age 70 ½ and must begin taking annual distributions.1
Roth IRAs: Contributions are not tax-deductible. However, distributions of contributions and earnings are free from federal taxes after a five-year holding period if you also meet certain other requirements, such as being age 59 ½.1
Which to choose? A Traditional IRA may be right for you if you want to reduce your yearly taxable income during your working years. Or, the Roth IRA might make more sense if you want to minimize taxes during retirement when you may be in a lower tax bracket. We can help you determine which one is more beneficial for you, considering your individual circumstances. Keep in mind that your contribution must be made before the tax filing deadline, so call us today at 541-225-5668.
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1. irs.gov/publications/p590/ch01.html