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It’s Not Too Late to Add to Your 2015 Tax Deductions & Contribute to Retirement at the Same Time | Business

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It’s Not Too Late to Add to Your 2015 Tax Deductions & Contribute to Retirement at the Same Time
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It’s Not Too Late to Add to Your 2015 Tax Deductions & Contribute to Retirement at the Same Time

By Michael D. Lee, CPA, PFS, Financial Education Manager, Golden 1 Credit Union

April is National Financial Literacy Month, and what better way to demonstrate financial literacy than by adopting a few smart behaviors that could save money on your 2015 tax bill and set the blueprint for a solid retirement?

More than 60 percent of Americans have less than $1,000 in savings and nearly half deposit less than 5 percent of their incomes into longer-term savings. What that means is the vast majority of Americans are significantly unprepared for unexpected financial burdens in the present, let alone setting themselves up to finance their retirement. With fewer U.S. companies offering 401(k) or matching retirement plans, there has never been a more critical time to open a self-directed retirement account that offers current and future tax benefits.

When considering setting up a retirement account, the most common options include the Traditional Individual Retirement Arrangement (IRA) and Roth IRA. Both offer tax advantages that, with a little planning, can potentially save hundreds of dollars in current-year taxes and significantly reduce tax burdens during retirement years.

Let’s take a look at the basics of each option and what you can do to get started:

IRAs Offer Long-Term Growth Potential

Contributions to a Roth IRA also grow tax deferred, but feature two major advantages: Withdrawals beginning at age 59 ½ are tax-free, provided funds have been held in a Roth for five years or longer. And, there are no maximum age requirements for mandatory distributions (unlike traditional IRAs, which require distributions beginning at age 70 ½).

A Roth IRA can have a tremendous impact on future retirement, especially for young people who have many years until they are considering retirement and can ride out typical swings in the equities market. For example, as reflected in the graphic from Bankrate.com, a 25 year old who contributes $5,000 annually for 40 years would amass a nest egg of approximately $634,000 in a Roth IRA at age 65 versus a taxable savings account (Federally insured by NCUA), based on an average annual return of a modest 5 percent, and could at 65 withdraw that money tax free.

Using a blend of accounts maximizes both portfolio diversification and tax advantages for most taxpayers. Contributions to a Roth IRA use after-tax earned income while those for a traditional IRA are typically pre-tax. For both plans, those under age 50 can contribute up to $5,500 a year while those 50 or older can contribute $6,500.

Both plans require qualifying income in order to participate. Examples of qualifying income would be from wages, earnings as an independent contractor, sole proprietor, or member of a partnership or limited liability company (LLC).

Key Differences Between Traditional and Roth IRAs

Traditional IRA:

·         59 ½: Minimum age participant must be to begin taking qualified distributions

·         70 ½: Maximum age at which participant must begin to take qualified distributions

·         Contributions are pre-tax and reduce taxable income

·         Distributions are taxed at current federal and state tax rates

Roth IRA:

·         59 ½: Minimum age participant must be to begin taking qualified distributions

·         There is no maximum age required to take qualified distributions

·         Contributions are post-tax and offer no tax advantage in the year of contribution

·         Qualified distributions (those taken after 5 years after the Roth is initially funded by participants who have attained the minimum age of 59 ½) are exempt from federal and state income taxes.

·         Contribution limits: Same for both plans. Participants can contribute up to $5,500 each year. There is an additional $1,000 “catch-up” provision if age 50 or older is reached by the end of the tax year.

There are other considerations relative to both plans including adjusted gross income limits.

Please consult your tax or investment advisor for a full range of variables, or contact Golden 1 Credit Union, which has a team of investment advisors who can help you determine the best retirement plan to ensure your Golden Years are well financed. Visit Golden1.com for more information.

 

SOURCES:

Marketwatch: 60% of Americans have less than $1,000 in savings

http://www.marketwatch.com/story/most-americans-have-less-than-1000-in-savings-2015-10-06

Almost half of Americans are not saving enough

http://www.usnews.com/news/articles/2015/03/30/almost-half-of-americans-arent-saving-nearly-enough

Roth IRA Calculator

http://www.bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx

History of the Roth IRA – Dream come true for late Sen. William Roth

http://www.rothira.com/blog/what-senator-william-roth-envisioned-for-the-roth-ira

Qualifying Income for IRA Contributions

http://fairmark.com/retirement/roth-accounts/contributions-to-roth-accounts/qualifying-income-for-ira-contributions/

 

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