Showing posts with label IRA tax deductions. Show all posts
Showing posts with label IRA tax deductions. Show all posts

Wednesday, December 2, 2020

Can You Take an IRA Deduction?

 Do you have an IRA? If so, you should know that, in some cases, you may be able to take a nice tax deduction for some of the money you contribute to it. With that said, however, like all things with the IRS, there are some rules and restrictions in place.   

The No Roth Rule  

First of all, understand that only traditional IRA contributions are eligible for deductions. If you have a Roth IRA, the deductions won’t apply to you. That’s because any withdrawals you make from your Roth are tax-free after retirement. You can’t have both that benefit and the benefit of a tax break at the time of contribution. The IRS just isn’t that nice, unfortunately.  



Limitations  

The IRS is also known for letting taxpayers benefit . . . but not too much from its allowed deductions, and the IRA deduction is no exception. If you’re 49 years of age or younger, you can enjoy a deduction for as much as $6000 in contributions. Add an extra thousand once you reach 50 or more.  

Also remember that, regardless of your age, you cannot contribute more to any IRA than you earn each year and still qualify for a deduction.  

Company Sponsored Plans  

What about if you also contribute to a company-sponsored plan? Unfortunately, if you meet these qualifications, you won’t be eligible for an IRA deduction:  

       You’re single or filing as head of household and have more than $75,000 in modified adjusted gross income.

       You’re married and filing jointly or are a qualified widower and have more than $124,000 in modified adjusted gross income.

Receiving Your Deduction

If, despite the many rules and limitations, you still qualify for an IRA deduction, you’ll be glad to know that it’s fairly easy to claim. You don’t even have to itemize deductions, unless you want to.

Just enter the deduction on Form 1040’s Schedule 1 Form, and you should be good to go!

Of course, with so many stipulations in place, it can be difficult to know if you qualify for this deduction or not. In some cases, you may qualify for a lesser deduction. To ensure you do qualify and, if so, for how much, and then to guarantee you file everything correctly, remember that it’s always best to seek the help of a qualified tax professional.

Thursday, September 17, 2020

Understanding IRA's


Opening an individual retirement account or IRA is a smart way to save for retirement. What you might not realize, however, is that not all IRAs are the same. There are actually different types of IRAs, and it’s important to understand the most common options and whether or not they’re right for you.   



Traditional IRAs

A traditional IRA is a very common option for retirement savings. These accounts can either be deductible or nondeductible.

Deductible accounts allow you to take a tax deduction for the contributions you make to your IRA, but you’ll have to pay taxes on your earnings and your original investment when you make a withdrawal.

With nondeductible IRAs, on the other hand, you can either not take a deduction or only take a partial deduction. Either way, you’ll be taxed on your earnings when you make a withdrawal.

A tax professional who is experienced with IRAs can get to know you and your situation, as well as your plans for the IRA, to help you make a decision about whether or not a traditional IRA is right for you and, if so, the best type of account for you to have.

Roth IRAs

Roth IRAs are different from their traditional counterparts in that you don’t get to take a deduction for your contributions. But, you can earn money without paying taxes on it!

Basically, with a Roth arrangement, you pay taxes on your initial investment, but you don’t have to pay them later. Of course, there are some rules in places, such as not being allowed to take distributions until you’re at least 59 and a half and keeping the funds invested for at least five years.

If you can’t follow these rules or if you think there’s a likelihood you might need to make a withdrawal before it’s allowed, this probably isn’t the right IRA for you. Your withdrawal will cause you to have to pay taxes plus a penalty!

As you can see, both IRA types have their benefits and drawbacks. For this reason, you’ll want to go over each option carefully with a financial professional to ensure you choose the absolute best one for you.