Tax benefits of IRA Contributions
Retirement may seem a long way away but investing as early and as frequently as possible will better prepare you for a comfortable retirement. In this blog, we provide you with types of Individual Retirement Accounts (IRAs) you can choose from that are available at most banks and credit unions.
One of the biggest advantages of contributing to an IRA is that you can reduce your taxable income, either now or in the future, an important consideration as we head into tax season.
Remember to always talk to your accountant or tax advisor about your current financial situation to determine which retirement vehicle is best for you. An investment advisor can help you create a long-term strategy based on your retirement goals.
There are two types of personal IRA options available: Traditional and Roth. The differences are simple, but which you choose to contribute to depends on your tax situation and income level. Both provide tax deduction benefits, and both can complement any company 401K retirement or pension plan you may already have. Investment gains grow tax free regardless of Traditional or Roth IRA. Review the IRS site for more detailed information.
When you contribute to a Traditional IRA, you are not taxed until the money is taken out of the IRA when you are retirement eligible, which means you can lower your current tax liability when you contribute to a Traditional IRA. You will pay taxes based on your tax bracket when you begin taking distributions, which is typically at a much lower tax rate since your retirement income is usually less.
Contributions to a Roth IRA are not tax-deductible because they are ‘after-tax’ dollars, meaning you pay taxes on those funds now. When you begin taking distributions after 59 ½ those funds are tax free because you’ve already paid taxes previously. Good option if you think your tax bracket will be higher later in life, post-retirement.
Total contributions for Traditional or Roth IRA can’t exceed $6,000 ($7,000 if you’re age 50 or older – extra $1000 is called “catch-up contribution”) for 2020 and 2021, respectively. Contribution limit does not apply to rollover contributions.
If you participate in a work retirement plan like a 401k, your contribution and tax deduction are determined by your gross annual income. You have to be below designated income limits in order to receive a deduction.
You don’t have to wait until you have the full $6,000 to contribute to an IRA; in fact, you can open an IRA at HOMEBANK with as little as $50. Then, you can schedule monthly or bi-weekly automatic transfers to save what you can throughout the year. Over the years, you will come to realize the power of compounding interest, which is when “an investment earns a return, and then the gains on the initial investment are reinvested and begin to earn returns of their own.”
Call HOMEBANK at 855-577-2001 for more information.