Key IRA Considerations During Tax Time

 |  General Self-Directed IRA Articles

By J.P. Dahdah, Founder & CEO of Vantage

Tax time. Key considerations

Every tax season, Americans are encouraged to maximize their annual IRA contributions by the tax filing deadline.

This message is both a tax tip and a retirement planning tip. 

The tax tip is to lower your tax bill based on the deductible benefit of IRA contributions. And the retirement planning tip is to reinforce the importance of depositing adequate amounts toward your financial independence goals. 

I want to share additional IRA considerations that may help your peace of mind this tax season. Below are some questions you may be asking yourself. 

Do I have the right type of IRA, given my current employment situation? 

 Two aspects in deciding if you have the right type of IRA involve your income level and your employment. Self-employed investors can establish additional IRAs, such as SEP and SIMPLE IRAs. The primary benefit of these IRAs is that they have higher contribution limits than Traditional and Roth IRAs.  

 However, if you are an employee, your employer may offer a 401(k) benefit with matching incentives, which may make it attractive to participate in but may limit your investment options to a small number of mutual funds.  

Even though you may enjoy the money your employer deposits into your 401(k), it makes sense to contribute an amount equal to the matching incentive in the 401(k).  

Additionally, you can make contributions to a Traditional IRA to broaden your alternative investment options that align with your comfort level.  

Remember, having various IRAs may be the best strategy to maximize your retirement savings and earning potential.  

Suppose you are married and have children. In that case, you may also want to consider what IRA type will complement your family’s overall tax and retirement planning.  

Given my retirement objectives, do my investments support my current risk tolerance, time horizon, and performance expectations?

Two specific ages have potential tax implications concerning your IRA, ages 59.5 and 72. Therefore, it is vital to have them on your radar and clarify how they play a factor in your financial situation.  

Any IRA income distributions before age 59.5 will be taxed at your income tax bracket, plus an additional 10% early distribution penalty. Meaning, you will want to avoid taking IRA distributions early.  

When you reach the age of 72, you must take a required minimum distribution (RMD) and each year thereafter.

Regardless of your age, consider how your target retirement age and chosen investment holdings impact your retirement income strategy. 

What role will my IRA play in my future retirement income tax strategy?  

Often, taxpayers place importance on income tax strategies that help lower their tax bill and not enough time evaluating strategies that will help balance the impact of taxes in the future. 

A proper retirement plan should include a balanced tax-minimizing approach. You can accomplish this with a thorough understanding of which financial vehicles to utilize for an ongoing tax-efficient strategy over time. 

 For example, consider a Roth IRA in your retirement savings plans to accumulate money that can later be distributed tax-free during retirement. The idea is to sacrifice a little income tax deductibility today to reduce the taxable retirement income amount later.  

 It’s a good practice to know where you stand financially with your taxes each year. Different retirement accounts have various tax implications. It’s crucial to understand how your accounts affect the amount you owe the government. 

For more information on how you can discover your IRA investing alternatives contact us

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