So many people open up an IRA account for the tax break, NOT for saving for retirement. This strategy often backfires since they end up paying more on the back-end than they saved at the onset. In 2012, you can contribute up to $5,000 in a traditional IRA ($6,000 if you are 50 or older). If certain requirements are met, you can deduct that money from your tax return.
There are different requirements based on income, filing status and whether or not your company offers a retirement plan (such as a 401k). If you (and your spouse if married) don’t have a retirement plan at work, then you can deduct contributions irregardless of your income. If you are covered by an employer-sponsored retirement plan then you cannot take a deduction if you earn over $68,000 per year ($112,000 for joint filers). Single filers who make $10,000 less get a partial deduction ($20,000 for joint filers). If your spouse is covered by a retirement plan through work, the limit is $183,000 (under $173,000 and you get the full deduction).
But, is the deduction really worth it right now? If instead you were to invest in a Roth IRA, which is funded with already-taxed income, then you enjoy tax-free distributions during retirement. The main advantage those looking for the savings now often overlook is the fact that not only do you pay taxes on your contributions when you withdraw them, you are also taxed on the income and appreciation you have accrued.
Granted, if you make too much money, the Roth option is not available to you. However, the less you make now, the better a Roth plan is for you since the deduction you can make now is minimal to the taxes you’ll save later on in life with a Roth IRA. Read more here at fool.com.
Let the tax experts at the IRA Financial Group help you decide what’s best for you. Call us today at 800.472.0646 or visit our website. Follow us on twitter for updates on newest blog posts and interesting articles. @BergmanIRA