With the April 15 tax deadline looming, you may have already given up on getting tax breaks, but all hope is not lost. IRAs are not like other deductions that expire on midnight, New Year’s Eve. You can still get tax breaks for last year if you sign up for an IRA before the tax deadline.
Unfortunately, many people don’t know this and the appeal of IRAs are lost on most Americans. According to surveys performed by TIAA-CREF, the numbers of adults contributing to IRAs has increased by 4 percent in 2012. As people begin getting the message, these numbers are starting to rise. Still, large numbers of individuals aren’t contributing to IRAs despite the fact that if an individual has income from a job, they qualify for some type of IRA.
Similarities Between Traditional and Roth IRA Accounts
Traditional and Roth IRA accounts offer account holders tax deferral benefits. The money an account holder contributes compounds tax-free as long as the money stays in the IRA account. Both types of accounts allow individuals to contribute up to $5,000 per year. Individuals aged 50 and older can contribute an additional $1,000 per year.
Differences Between Traditional and Roth IRA Accounts
Of course, this is where the similarities between Roth and traditional IRAs end. Money withdrawn from Roth IRAs can be taken out without tax penalties as long as the account has been maintained for at least five years and you’re older than 59. This feature is enticing for folks who believe the federal tax rate will be rising in their near future, or who believe their incomes will be increasing in the next few years. Withdrawals from traditional IRAs are taxable. Conversely, traditional IRAs usually offer account holders a better initial deal. Account holders can deduct contributions while investments in Roth IRAs aren’t deductible.
Who Benefits from Each Type of IRA?
Individuals who are younger adults that are just beginning their careers would be best served with a Roth IRA, primarily if their income lands in a lower tax bracket. Investors who have income that falls in the lower end of the tax bracket will enjoy years of tax-deferred growth, and eventually tax-free withdrawals. Roth IRAs also let account holders withdraw their original contributions at any time without fear of facing hefty tax penalties. This is especially good for people who worry about not having access to their money if an emergency occurs.
IRAs are an excellent tax-deferred investment that most people overlook. It makes sense for people to invest in this type of account when saving for their retirement. Why not take advantage of this significant tax benefit for your 2014 taxes while there is still time?
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