How Much Can Taxes Be Lowered by Contributing During Tax Season?

When a traditional IRA is used and if you make a contribution that qualifies as deductible, the contribution amount is deducted from your adjusted gross income. Taxes aren’t paid on IRA funds until they are withdrawn. With IRAs, the money is intended to remain in the fund until retirement, and penalties for early withdrawal are substantial.

The limit on IRA contributions is $6,500 per person for the 2023 tax year for most people. For those age 50 or over, the limit jumps to $7,500. This means that everyone who is eligible can reduce their adjusted gross income by $6,500 by contributing up to the limit.

Extra tax breaks exist for people who have lower incomes. These breaks reach up to $1,000 for singles and $2,000 for married couples. This break takes the form of a federal tax credit called the retirement savings credit. Unlike deductions, tax credits are directly applied to tax liability just like regular tax payments would be. This means that eligible filers can even end up getting a refund thanks to this credit.

Eligibility for these credits depends on income, and the cutoff increases every year. Check with a tax professional or financial adviser to learn the current limits.

The biggest immediate tax benefits are obtained by those who make the maximum contribution to a traditional IRA and qualify for the full tax credit. For those who would rather lower their tax liability at retirement time, a Roth IRA should be considered. With a Roth IRA, taxes are paid during the contribution year but aren’t charged at the time of retirement.

Ensuring Proper Credit for Contributions Made Early in the Year

When contributions are made between January 1 and April 15, it’s important to tell the financial institution which year to apply the contributions. This is because contributions made during this time can legally be applied either to the prior tax year or the current one. If the goal is to cut taxes this year, be sure that the contribution is credited to last year’s IRA cycle.

The practice of contributing to IRAs during tax season exists because of the April 15 cutoff date. This date sets IRAs apart from other financial instruments, which have December 31 as their cutoffs. By keeping it in mind, investors can keep more money in their portfolios even after the first of the year.

When trading options in an IRA, there are significant limitations as to how potential losses can be covered.

eOption IRAs incur an annual fee of $15.00. A Closing Fee of $50.00 will apply to Total Distributions, and an ACAT Transfer Fee of $60.00 may apply.

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When an IRA is offered by your employer, there’s no need to choose an investment company. The company you work for will have already chosen one, and it will offer you a set variety of retirement account options. If you want to invest for retirement on your own, however, you’ll need to start by deciding which investment firm you want. Here’s what to look for when choosing an investment company for an IRA:

Level of Personal Attention

Investment companies take several forms, each one offering its own type and level of personal attention. Traditional brokerages tend to offer the most attention, and they’re willing to provide financial advice. This advice comes at extra cost, which takes away from profits but helps to ensure the attention of the adviser.

Hometown banks also offer plenty of personal attention and can set up an IRA. Their other investment options, however, are limited. Independent advisers are another high-touch option, but their fees can be so high that they negate much of the profit.

On the low-attention end, online brokerages take the lead but with much lower fees. Traditional brokerages will also step back on the attention level if their advisory services aren’t used. These options are good for investors who know exactly what they want and another’s input is less important to them.

Investment Choices

Each type of investment company offers a different level of choices. The biggest menus of options are found at brokerages. There, you can set up IRAs, buy stocks and bonds, buy mutual funds, and more. On the other side of the spectrum, there are hometown banks. Local banks tend to offer options such as IRAs, CDs, and old-fashioned passbook savings accounts.

Your Overall Financial Goals

This is one of the most important things to consider when looking for an investment company. If you just want an IRA – and don’t expect to ever want any other form of investment instrument – a basic provider will usually cover the necessary details. If your goal is to add other investment types later on, such as stocks, bonds, or mutual funds, then it’s better to go with a company that offers a wide variety of options. The other options can be accessed when the time comes.

Company Background and Expected Stability

No matter what an investment company offers, it will be for naught if the business folds or encounters other significant difficulties. Therefore, it’s important to research the firm’s background. Look for a good track record for its investment offerings as well as for the company itself. If an individual broker or adviser will be used, check his or her background as well.

Careful consideration and research are the keys to choosing the best company for any specific investment plan. There is no single right answer, so it’s important to take the time to choose the company that’ll be the best match.

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Investing in an IRA for Retirement

Selection of a traditional IRA or a ROTH IRA depends on your goals and needs. You may want to discuss the options with your financial or tax advisor, but in general, IRAs offer savings benefits. The main benefit for younger persons is a longer time to make contributions and to build up the account balance. IRA accounts are still excellent for older people also, but age qualifications may affect your decision about which type (traditional or ROTH) will best serve you.

IRA Differences

There are significant differences between the traditional types of IRA accounts and the ROTH IRA. Your choice will depend on many things, including your age, income, and goals for the account.

• Traditional IRA – has contribution limits ($6,500/$7,500 if you are over 50 years old), no taxes on capital gains, dividends, distributions until you withdraw them. Due to changes made by the SECURE Act, if your 70th birthday is July 1, 2019 or later, you do not have to take withdrawals until you reach age 72.
• Roth IRA – Contribution limits yearly same as traditional IRA, tax-free growth – you cannot deduct contributions but no tax owed on retirement withdrawals and no mandatory withdrawals at 72. ROTH IRAs do not require withdrawals until after the death of the owner. For more information, see www.irs.gov/retirement-plans/roth-iras
• SEP IRA (a type of traditional IRA) for self-employed individuals & business owners, has higher contribution levels; has employer restrictions about contributions.
• SIMPLE IRA (a type of traditional IRA) similar to SEP IRA.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act makes it easier for you to access your savings in Individual Retirement Arrangements (IRAs) and workplace retirement plans if you’re affected by the coronavirus. This relief provides favorable tax treatment for certain withdrawals from retirement plans and IRAs, including expanded loan options. For more information, see www.irs.gov/newsroom/coronavirus-relief-for-retirement-plans-and-iras

Important Goals to Set with My IRA

With all IRA Accounts, you should set end goals; what do you want this account to accomplish? For most people, the desired goals are growth over time and to provide additional income in retirement, and minimizing the tax bite is always a factor. Remember, however, that a traditional IRA can also be rolled over into a tax-advantaged ROTH IRA at a later date. Again, your financial advisor should be able to help you with goal setting and taxation specifics. As you think about goals, write them down, make a list to refer to over time. This will help you stay on track for accomplishing your goals over time.

• General Goals – These should be phrased in a positive light. Include a list of broad goals, such as dreams you have for the future, how you wish to live in retirement and what plans you might want for your heirs with regard to inheritance.
• Specific Goals – Put these on your written list. Include goals and a time frame for completion. Review these goals periodically and compare where you are at each review in relation to your ultimate goals. Always include numbers and dates. Use available calculation tools, and try to estimate your future living costs.
• Investment Goals – When you are younger, you can have aggressive investment goals, but as you get closer to retirement, switch over to conservative investments. Always beware of general market risks – nothing is guaranteed.

IRA differences are primarily financial benefits, such as tax deferments, penalty-free withdrawals or the ability to leave heirs a tax-free inheritance gift. Some limitations apply to each type, but in general, opening an IRA account is an excellent idea, especially for younger persons.

eOption, a division of Regal Securities, Inc., makes neither a recommendation as to the appropriateness of investing in any specific investment product nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions, and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions. Clients should take special care in understanding all of the risks involved prior to investing.

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When Is It a Bad Idea to Save for Retirement?

The worst time to save is when a person has high-interest debt. The interest charges from the debt are higher than the interest to be gained from saving. Ultimately, this means the person is losing money by saving money. Therefore, high-interest debt should be paid off before starting a saving plan.

It is also a wise decision to delay retirement savings if one’s short-term savings are low or nonexistent. Everyone should have enough easily-accessible savings to cover six months or more of unemployment. This should be prioritized over long-term plans.

When Is It a Good Idea to Put Money into Retirement Savings?

Any time other than the above circumstances are not present is a good time to save for retirement. There are times that it seems impossible to save, but it is always possible to put money away, if only a little. Teenagers with part-time jobs can put away $10 or $20 from each paycheck to get started and build from there. With compounding interest and the passage of time, even a small seed can turn into a large fund by age 65. The most logical course of action is to save more when possible, over time. When people get higher-paying jobs, they should increase their savings to match.

What Are Some Popular Retirement Savings Options?

IRAs, or Individual Retirement Accounts, are some of the most popular choices for retirement savings, another being the 401(k) plan. One of the reasons for the popularity of certain IRAs is that they are tax-deferred. That means no taxes are paid on the money until it is finally withdrawn. The same is true for 401(k) plans.

At many businesses, the company itself will offer one or more of these plans for employee participation. This makes it easy to save – just have the company deduct a specified amount from each check. Some companies will contribute their own funds to match employee contributions, and this makes such plans even more enticing. Because of this, people who work at these businesses are often planning for retirement with an IRA.

One thing to remember: IRAs have yearly contribution caps. Those who want to save more will need to add other investments. Stocks and bonds are popular choices thanks to their potential for good returns and the ability to adjust the amount of risk in the portfolio.

The post When to Start Saving for Retirement first appeared on eOption.

People starting to save for retirement will quickly find that many sources recommend using individual retirement accounts (IRAs) for this purpose. However, they will see that there is a bewildering array of accounts with this name. What is the difference between IRA accounts? Here is a quick overview to help clear things up:

Roth IRAs

While most IRAs are tax-free until their money is withdrawn, the Roth IRAs do things the other way around. Taxes are paid on money when it is earned, not upon withdrawal. Like anything else, this has its own set of pros and cons. The drawback appears as less money to invest initially since taxes have already been removed. However, the benefit is that when withdrawal time comes, the investor does not have to worry about the disbursal getting minimized. This works out well when a large amount of interest has been earned. Another consideration is that people are only eligible to use a Roth IRA if they are within a certain income bracket. Those who make too much have to choose a different type of account. How much is too much? The answer to that fluctuates with the market and politics. Roth IRA income limits for the 2023 tax year are $153,000 ($161,000 in 2024) for single filers and $228,000 ($240,000 in 2024) for married couples filing jointly.

SEP IRAs

The Simplified Employee Pension (SEP) IRA plan allows employers to add contributions to employees’ traditional IRA plans. Because of this connection, workers must set up a traditional plan before the SEP can start. Once it does, the traditional plan is normally referred to as a SEP IRA. This type of plan is not restricted to traditional employees. It can be set up by the owners of sole proprietorships and other entrepreneurial ventures – even if the owner is the only “employee.” Because of this, there is little difference between personal and small business IRA accounts. One of the main benefits of this plan is that it allows for additional contributions to the regular IRA without running afoul of the original plan’s contribution limits. However, the ability to deduct traditional contributions may be affected.

Traditional IRA Plans

In order to understand the difference between Roth and traditional IRAs, one must know how a traditional IRA works. They are tax-deferred retirement savings accounts that allow for savings over a long span of time. They come in two forms: deductible and non-deductible. The deductible form allows people to deduct contributions from their taxes. This essentially makes the eligible contributions tax-free. Non-deductible plans, as their category name implies, have no such perk. The chosen plan depends mainly on eligibility status, like filing status, income level, the presence or absence of Social Security income.

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