Just how much money do you plan on retiring with? Do you want your investments to pay for your kids’ college education? Finance your dream house so that you can retire at the lake? What is it that you want to accomplish? Whatever it is, it’s probable that you want to do it the most profitable way and pay the least amount of taxes possible.
There are two definite things in life: death and taxes. There’s no getting out of either one of them. Taxes on IRA’s, just like your income, depend on the amount of money that you make. You just need to decide if you want to pay taxes on the money that you will definitely put in now, or may take out later.
Let me back up a bit: There are 11 different types of IRA’s. We will discuss the tax angles of the 3 most popular: Traditional, Educational and Roth.
Traditional
This popular Individual Retirement Account allows investors to deposit up to $4,000 annually ($8,000 for a married couple), plus an additional $500 to “catch-up” if you’re over 50, into a tax-deferred account for retirement. A financial company is responsible for taking your money and making more with it, with the hopes of earning you ample funds for a happy, worry-free retirement.
The taxes come into play when you withdraw the funds, as you must pay taxes on every dime that you take out, including the money earned on the investments.
Roth
The late 1990’s saw the introduction of the Roth IRA. The caps remain the same as a Traditional IRA at $4,000 each, but the mere thought of being able to put hard earned money into an account without ever having to pay federal income tax on its growth had the average American dreaming in dollar signs. Years of compounded savings, all tax-free (well, almost).
The taxes are paid here as the money goes into the account; and that’s pretty much it.
Education
This type of IRA is now referred to as a Coverdell Education Savings Account. It allows contributions of up to $2,000 per beneficiary each year. Contributions must be made before the beneficiary turns 18. Basically, you can put aside $2,000 each year for a child’s education tax-free!
The taxes come into play when you don’t use the money for qualified expenses. Withdrawals for tuition, fees, and room and board, are usually tax-free. College-prep private school costs are generally tax-free as well. The amount of contribution you can make decreases significantly if your adjusted gross income in one tax year is more than $190,000 when filed jointly. All contributions are phased out completely if your adjusted gross income hits $220,000 annually when jointly filed.
