By Michael G. Kelly, Attorney at Law
Kelly Law and Tax
IRAs contribution are a very attractive way to minimize taxes in the current year as well as in subsequent tax years for taxpayers who meet the legal requirements for eligibility. There are two main types of IRAs: A Traditional IRA, which allows a limited pre-tax contribution from earned income each year; and a Roth IRA, which allows a limited after-tax contribution from earned income each year. The combined limits for both types of IRAs are $6,000 per year ($7,000 for persons over 50) per person in 2019.
The tax benefits from contributing to a Traditional IRA are the ability to defer tax payments on the income until retirement. Rather than going to the IRS as tax payments, the funds are continuously invested in growing the retirement account. On retirement the taxes are only paid as funds are withdrawn, likely at a lower marginal rate than when a person is younger and working. You may also take a deduction against gross income in the amount of the contribution to further lower the current year tax bill. In addition, A “Savers” Credit is also available which allows a taxpayer to reduce their actual tax bill dollar for dollar on a percentage basis.
The chief tax benefit from contributing to a Roth IRA is that any taxpayer funds that have already been taxed can be diverted to the Roth Account and the income generated from those funds will not be subject to income tax at any time (as opposed to being left in a regular interest/dividend/capital gains bearing account and subject to tax). For example, if you have $7,000 in an investment account earning 5% interest, your simple interest income is $350. At a 22% marginal tax rate your tax is $77 on the income. This is $77 you can save, increasing year after year, by placing the $7,000 in a Roth IRA.
The “Savers” Credit mentioned above is also available for a Roth IRA, further lowering your tax bill.
A taxpayer can wait up until April 15 of 2020 to make a contribution for 2019. Unfortunately many people make the mistake of actually waiting up until this deadline to do so. You can make the contribution any time during a tax year and begin to enjoy the above benefits immediately.