IRA Investments – The Secret behind Cracking a Smile while Paying Taxes

While preparing their annual returns, taxpayers certainly yearn for saving a little more of their income. Though tax deductions aren’t as helpful as a tax credit, they still hold the capacity to lower the overall tax liability of a taxpayer. Moreover, if their income is landing near the next tax bracket, another beneficial deduction could really be helpful at the end of the day. However, isn’t it too late? With regular tax reminders hitting the inbox, the tax season has occupied a place just around the corner. As the final days come nearer, there is nothing much that a taxpayer can do to cut down the total amount of tax billing, rather than avoiding some inane errors and taking precautionary steps while filing their return. However, the good news is that the taxpayers still have almost 2 months to make one potentially beneficial decision – make a contribution towards IRA for reducing the tax liability or not.

IRA – The Tax Saver

In the present day economy, people see IRA merely as a decent medium of investing for retirement. What people might not know about it is the tax saving aspect of the IRA investments. IRAs are the greatest gifts for enjoying a long-term tax-free haven. The hard earned money of the investors is contributed towards mutual funds and all the resultant earnings, including interest income, capital gains and dividends, tend to grow tax-deferred. For those who are already short on money, investing in IRA might not be a perfect solution. However, for those who can very well afford it, paying lesser amount towards taxes on the money that will certainly grow over years, or even decades, clearly is a no-brainer.

The money one invests in IRA remains tax-free for as long as it remains in the account. Beyond that, the amount of tax savings will depend on the type of IRA (tax deferred or tax free) a person has, the amount of annual contribution made towards it, and the income earned on a yearly basis from the same. When it comes to withdrawing money from the IRA account, the investors can soften their overall tax burden and take it to the pocket-friendly side with keeping the withdrawal limit to tax-efficient levels. As per a conventional wisdom, it is always wise to tap the taxable accounts first and let the investments in the tax-deferred and tax-free accounts enjoy an unregulated growth over a period of time.

Tax-deferred Accounts

Tax Deferred Retirement Accounts include traditional IRA’s, 401(k)’s and several other retirement saving plans. Any amount of money withdrawn from these banks will be taxed as the normal income of an individual and will be subject to ordinary income tax bracket and rates, except the after-tax contributions made by the investors. The investors should make use of these accounts for channelizing their contributions towards the investments that are taxed at normal income tax rates, including real estate trust investments, bond funds, individual bonds, preferred stocks and others.

Tax-free Accounts

There is one kind of tax-free retirement account and is probably, the last one in the queue – Roth IRA. An investor can withdraw any amount of money from their Roth IRA at any time, without any fear of tax-liabilities or resultant penalties. As long as the investor has crossed the age bar of 59½ and has maintained the Roth account for a period of 5 years, at the least, the qualified distributions and incomes are totally tax-free. On the other hand, instead of withdrawing the money, the account holders can leave it to their heirs, who will also be able to enjoy tax-free distributions in the future.

Tax Saving Benefits of a Roth IRA Conversion by MonkeySee

Since Roth IRAs are not covered in any tax brackets, they are considered to be the most suitable medium for putting the hard-earned income in a wide variety of investments. The Roth contributions should ideally be channelized towards aggressive stock funds. One of the prime reasons behind concentrating on aggressive funds is that they provide a healthy time frame for the growth of the investments and that too, without any worry about dealing with taxed profits.

Contribution and Deduction Limits for 2014

As per the new IRS amendments, the maximum contributions, that an individual can make towards the traditional and Roth IRAs equals to