Many New Year’s Resolutions for 2012 included opening an IRA. Now that it’s October, it’s time to ask if your Individual Retirement Account is open and have you started to fund it? A traditional IRA is an investment tool and another way to save for retirement. If you do not have a 401(k) with your employer, an individual retirement account is an excellent way to prepare for the future. And if you have an employee-sponsored retirement account, opening an IRA can add to your existing retirement savings.
The maximum you can contribute annually to a traditional IRA fluctuates. As of 2012, you can contribute up to $5,000 annually to your IRA (up to 6,000 annually if you’re over the age of 50). IRA’s are an attractive investment option because earnings are not taxed until you withdraw funds. Additionally, your annual contributions are tax-deductible. If you’re in danger of moving up a tax bracket, or if you simply cannot afford a high tax bill, opening a traditional IRA and funding this account can significantly reduce what you owe in taxes. A Roth IRA is another savings tools. But unlike a traditional IRA, a Roth IRA offers no immediate tax benefits.
What’s interesting is that you don’t have to open the IRA during the actual tax year to enjoy the benefits. You have up until the yearly tax deadline to open and fund your account — usually around April 15th. For example, if filing a 2012 tax return, you can open an IRA as late as April 15th, 2013 in order to write off your contributions on your 2012 return. This feature is perfect for taxpayers who complete their tax return, only to discover that they need additional write-offs. Your tax professional can help you determine the most appropriate contribution to lower your tax liability. Once you’ve established an amount, you can use emergency savings or other personal savings to fund your individual retirement account.
At this time of year, many people are starting to think about ways to reduce their tax liability. Owing the IRS can create a huge financial burden. Maybe you’re self-employed and didn’t send quarterly payments during the year, or perhaps your employer didn’t withhold enough taxes from your check. Whatever the reason, nobody enjoys giving the IRS their hard-earned money. But what choice do you have? Either pay up or deal with the consequences. While you can’t dodge what you owe the IRS, there is a way to reduce how much you owe by opening an IRA.
Setting up an IRA is relatively simple and there are several ways to get your account up and running. You can open an IRA with your bank or work with an investment firm. The requirements for an IRA vary by bank or investment firm. Some firms require a minimum deposit of $1,000, whereas other firms require a minimum deposit of $5,000. Shop around, speak with different advisors and know your options before opening an IRA.