How to Maximize your Tax Benefits with an IRA Account
IRAs, or Individual Retirement Accounts, allow you to save for retirement with tax benefits throughout your life. There are limits to the tax benefits, however, but you can easily follow the rules and still gain substantial income. Take a look at your finances, and decide on the best savings amount for you and your family.
Save To the Limit
Because it is your own personal savings account, you can potentially contribute as much money as you desire. However, you do not benefit with tax savings on all of your contributions. Currently, you receive a tax break when you contribute up to $5,500 to a traditional IRA. People older than age 50 can contribute up to $6,500, and receive tax benefits. Make this maximum limit your goal for the year to maximize your tax benefits.
In a perfect world, you should contribute the maximum tax benefit amount to your IRA as early in the year as possible. This strategy allows you to gain as much interest as possible off of your balance. Because this strategy is not realistic for most people, try to contribute consistently through the year. Each month, or each paycheck, should have an automatic amount sent to the IRA account. This way, you are not tempted to spend the money if it is already making money at the bank.
Be Aware of Contribution Deadlines
Unlike other tax benefits, you are not limited by the end of the calendar year to make IRA contributions. If you are just short of your maximum contribution for the year, you can still add more money to the IRA until the tax deadline, typically in April. You have a full three months to contribute more money past year-end, and receive as much of a tax break as possible.
Your IRA account does not provide the most tax benefits unless you claim the deduction on your federal income tax. When tax time rolls around in April, make sure to claim the full amount you contributed to the stipulated limit. This deduction actually reduces your taxable income. In essence, it makes it seem that you made less money last year, forcing you into a lower tax bracket. You pay less taxes on your remaining income while gaining more money with the funds in the IRA account.
Avoid Early Withdrawals
You lose a lot of tax benefits if you withdraw any amount from the IRA early. Currently, a 10% fee is required of a withdrawal from a person younger than 59 years of age. You must also report the withdrawal as income that year, possibly increasing your tax amount. It is best to wait until you are 60 years old to start any distributions.
Convert to a Roth
For even more added tax benefits, consider converting your traditional IRA to a Roth. Although a Roth is a type of IRA, you can withdraw funds without being taxed in specific situations. Be aware that laws may change, however, making this tax benefit limited. If you have a possible withdrawal pending, it is best to convert your IRA now to reap the rewards. You do not want to be taxed on an early withdrawal from a traditional IRA.
IRAs are meant to help you save for retirement. Pay attention to current laws and regulations to get the most out of your money today.