Several Things to Consider When Setting Up an IRA Account
When a person is planning for their retirement future, setting up an IRA account should be included in this strategy. Nevertheless, it is crucial to fully understand the distinctive types of IRAs that a person can put into place for their retirement years. For that reason, we are going to take a closer look on the different account types, which can be opened depending upon the person’s income levels, and other factors too. Therefore, if you are having difficulties trying to determine on your own the ideal approach for your financial situation, we encourage you to read on to better help you learn more on this aspect.
When an individual starts out earning income, either by being self-employed, or via an employer in the work force, they should also be planning for their future. However, people may not be aware of how they should be setting aside a portion of their income to help them be able to continue to cover their living expenses when the time comes for them to retire. For that reason, opening up an individual retirement account, or as it is most commonly referred to, as an IRA, is crucial to how well the financial situation will work when the time comes.
With that said, there are several aspects that must be taken into consideration prior to opening up the initial account. For instance, if the person’s income levels are over a certain amount, they may not want to open a traditional IRA account. Additionally, the better option instead might be to open up what is called a Roth IRA.
The Roth IRA was introduced to help individuals whose income levels put them into a higher tax bracket, the opportunity still to contribute to their overall retirement accounts, and potentially get certain tax breaks when qualified. However, the difference between these types of accounts, is that there are different rules in place, on how the person can get a tax break on the contributions they made. That being said, with the traditional IRA account, the person’s deduction credits they can take on their adjusted gross income is based currently between $61,000, and $71,000 for a single person, or head of household filing taxpayers. Additionally, for a person filing a joint return whose gross income levels are between zero, and $10,000; they too could use the traditional IRA, and get the tax deduction saver credit.
However, taxpayers who are covered by their employer’s retirement plan, will be subject to having these deductions phased out for them, if they are in certain tax earning level brackets. Furthermore, if the person opened up a traditional IRA, then they must contribute up to $5,500 into it yearly to qualify for the tax break too. Moreover, a person should consider using the traditional IRA option to help them with their tax obligations, if they fall into the lower-income bracket. The reason being, is that with a traditional IRA account, the person would be able to defer the tax owed on the contributions they make until the funds are withdrawn.
Therefore, this could help the person possibly to avoid paying a higher tax on the contribution, especially if they fall into a lower tax bracket when they reach retirement age. Having said that, think about it like this; right now if you had to pay tax on that $5,500 contribution into your IRA account, then you would typically lose the whole amount of tax paid owed. However, if you were to defer that tax, and pay on it at the time you withdrew it from your account, say 20-45 years later, and you now are in a lower retirement earning levels bracket, your tax on those identical contributions could potentially save you on the amount of taxes owed for those same funds deposited in.
Furthermore, with the traditional IRA account, if the person is under the age of 50, they currently can get a tax deduction for contributions into their retirement fund up to a total of $5,500. If, they are over the age of 50, then they can contribute up to $6,500 yearly, but it is advisable always to check with your financial advisor, and the IRS as this amount could change from year to year. On the other hand, if the person’s income levels are in the higher tax bracket, they instead would benefit better by opening up an ROTH IRA. Having said that, this type of account still lets the person, or employees make contributions into their retirement fund, even though they fall into the higher tax bracket.
Keeping that thought in mind, when opening up a ROTH IRA, the individual will not be able to deduct their savings amounts that they contribute into their accounts. However, when they do reach retirement age, they will not be paying tax on the money they withdraw either. The reason being, is that the person will pay the income tax on the money they deposit into their ROTH IRA each year when filing their returns.
That being said, for most of us, when we are trying to decide, which account, we should open it can be confusing to start with. Therefore, typically if you are going to be in a higher tax bracket when the time comes to retire, it would prove to be more advantageous to select a ROTH IRA account. However, if your income levels are placing you already into a higher tax bracket now, then a traditional IRA could be more beneficial in helping to offset your entire tax obligations long term.
When someone is trying to determine the best approach to take for their overall retirement strategy, it can at times be very overwhelming. However, starting with setting aside money, while able to work could prove to lessen the shock when we become eligible to retire. Finally, opening up either a ROTH IRA, or a traditional IRA based upon the tips we provide our readers with today, could be the best approach to ensure that when we are in our retirement years, we will still be capable to live our lifestyles comfortably by planning for them with the contributions we make into our accounts starting from today.