Traditional IRA contributions are tax-deductible in the year of contribution and the withdrawals are taxable in the year withdrawn. A contribution to a traditional IRA is a good way to possibly reduce your current year’s tax bill.
However, contributions to a Roth IRA is a great way to save you taxes in the long run on your retirement savings. The reason for this is that while the contributions to the Roth IRA account are not tax-deductible, the earnings in the account over the years will grow tax-free. A Roth IRA account makes sense for anyone who expects to be in a higher tax bracket later in life. If this is the situation, it’s better for the taxpayer to pay the tax on the contributions made now while he’s at a lower tax rate than pay a higher tax rate on the withdrawals from the IRA later in life.
Benefits of Roth IRAs:
- Tax-free earnings on savings.
- No penalties and taxes anytime on withdrawal of contributions (Note: earnings can only be withdrawn tax-free after you are 59 ½ years old when the account has been open at least 5 years).
- No age restrictions on contributions.
- No minimum distribution required at 70 ½ (required with traditional IRA).
The maximum contribution is $5,500 for 2014 ($6,500 if 50 years or older) and you can’t contribute more than your earned income. The eligibility to contribute to a Roth IRA phases out for higher income earners at $191,000 for married tax filers and $129,000 for single filers for 2014.
The deadline to take advantage of this great savings tool and make Roth IRA contributions for 2014 is the tax return deadline of April 15, 2015.
Please don’t hesitate to contact us if you need any further tax advice or tax planning.
Allen & Company, PC - a north Atlanta CPA firm providing accounting, financial statement audit, taxation, and advisory services for individuals and businesses. Extensive experience working with franchises.