Two Ways to Save Taxes
As federal and state tax filing deadlines approach, you may naturally wonder how to minimize your taxes. Traditional and Roth IRAs are two options that may help reduce your total tax bill for 2018 and beyond, and you can open one for tax year 2018 up to the tax filing deadline in 2019.
Traditional IRAIf you qualify by income, contributions* made to this IRA are tax-deferred. In 2018, contribute up to $5,500, indexed to inflation, and an extra $1,000 catchup contribution if you are age 50 or older during any part of 2018. The $5,500 annual limit, incidentally, applies to all contributions made to all of your IRAs. Whether they contribute before or after tax, everyone can take advantage of any IRA’s tax-deferred potential earnings.
The current tax reduction can be considerable if you make a deductible contribution of $6,500 to a traditional IRA and are in the 30% combined tax bracket (state and federal taxes), saving $1,950 on your 2018 taxes. These savings add up over time and can benefit you in other areas — especially if you add the savings to, say, your 401(k) plan contributions or 529 plan college savings.
Roth IRAIn contrast, a Roth IRA does not offer a current tax deduction for contributions, so you can’t reduce your 2018 tax bill by opening one. You will, however, find a number of advantages to this type of IRA account, not the least having to do with future taxes.
Like a traditional IRA, the Roth offers tax-deferred potential growth. Unlike the traditional type, the Roth doesn’t mandate minimum distributions at age 70 1/2; you don’t even have to take a Roth distribution during your lifetime. The biggest advantage, however, is the tax-free nature of distributions if you are at least age 59 1/2 and have owned the Roth IRA five years or more.
Talk to Your ProfessionalYour financial professional can help you decide which type of account is right for you. It’s your choice whether to take advantage of tax savings now or in retirement.