Tax Time: Take a Moment to Think About Retirement
Financial planning is an ongoing exercise. At tax time there is an especially good reason to pause for a moment and consider the future. As you may already know, federal tax laws allow individuals to take action on their own retirement planning above and beyond employers' plans and social security benefits. This is allowed through Individual Retirement Accounts (IRA's). There are three basic types of IRA's:
- A traditional IRA offers a tax deduction for the tax year in which the contribution was made.
- A Roth IRA gives investors the chance to invest money after taxes and then take the contributions and earnings out tax-free in retirement.
- A nondeductible IRA is generally the only alternative for very high earners who otherwise don't qualify for the other types.
Most of us would be concerned with only numbers 1 & 2 above, and my personal preference for myself and family is #2, the Roth IRA. Contributions to Roth IRAs are made after taxes are paid, so there is no deduction. Instead the contribution grows tax-free over the life of the account. There aren't many things in life that are free, but the idea is that you put money in and as long as you wait until age 59 1/2, all the earnings come out tax-free. That is a huge benefit, especially when you are young and have the advantage of time working on your side. If you have a tax refund due this year, consider using it to fund your Roth IRA.
Article written by Patrick Catania