The saying goes “The more things change, the more they remain the same.”
As you probably now know, the new year brings about some noticeable changes in terms of retirement planning and the function of certain financial products; however, the same basics from 10 years ago still apply: open an IRA if you desire to see a financially secure and prosperous retirement.
A change in the tax laws that came from the recently passed reform effort in Congress has changed the rules for IRAs. This has made some people nervous about making decisions that directly involve retirement accounts. In reality, for most people with predictable income there's absolutely no reason to wait. Getting started as soon as possible is key. Although tax laws have changed, the benefits of IRAs are still nearly unmatchable.
According to Dan Caplinger, Director of Investment Planning for the Motley Fool, the tax benefits of IRAs include the up-front deductions for many taxpayers who contribute to traditional IRAs, tax-deferred growth during the time your savings grow inside the IRA, and tax-free distributions for those who choose Roth IRAs as their retirement vehicle.
“IRAs are simple yet powerful retirement savings tools. Unlike 401(k) and similar plans, which require employer participation, anyone can invest in at least one type of IRA,” Caplingers says. “Contribution limits are relatively generous, with contributions of up to $5,500 each year in 2017 and 2018 for those who are under 50 years old and $6,500 each year for those 50 or older.”
The income limits that apply to determine if you can deduct all or some of the contribution amount has increased slightly; however, the contribution amounts are the same as they have been in the past few years.
You’re allowed to contribute to an IRA anytime for a given tax year until the April due date of your tax return, meaning that you'll have until mid-April 2018 in order to make a contribution for the 2017 tax year, and until April 2019 to make your 2018 contribution.
There are two common IRA types: Roth IRAs and traditional IRAs. The most common question many people have is which one to utilize. With a Traditional or Roth IRA from MAX, you can save for the future. The Traditional IRA is easy to maintain and may offer you important tax advantages, such as deductible contributions and tax-deferred earnings. Earnings from a Roth IRA that are distributed in a qualified manner are not subject to federal income tax, offering certain benefits for beginning your retirement early.
The most notable difference between the two is primarily when you pay income tax on the money in the account. With a traditional IRA, you pay income tax on the withdrawals. However, you may be able to deduct the amount of your contributions in the year you make them, possibly giving you a tax break. With a Roth IRA, you pay taxes on the money before you add it to the IRA. As a result, any qualified withdrawals from the IRA are tax-free. Consult your tax advisor for details.
Generally speaking, if you believe you will be in a higher tax bracket later in life, it may be wise to consider a Roth IRA. Remember, a Roth IRA saves on taxes later because you pay taxes on the money you contribute now. So if you believe your tax bracket will be higher when you retire, paying taxes on your contributions now can be a strategic way to save cash in the long run.
If you’re looking for a way to reduce your current tax liability, a traditional IRA is probably best.
IRAs should be an essential part of your retirement planning.
Consult your tax advisor or tax professional.