Tax planning is an important part of any financial plan. A common goal we all have is to keep as much of our hard-earned money in our pockets as possible and away from Uncle Sam. However, the best way to do this varies from person to person based on their unique financial situation.
For many people, the decision comes down to a traditional IRA versus a Roth IRA. Both have unique tax benefits and can provide tax-free or tax-deferred savings for retirement.
For example, when using a traditional IRA, the tax savings are realized now by taking a deduction on your tax return, but you will have to pay taxes on your withdrawals in retirement.
When using a Roth IRA, however, you pay taxes on the income this year, but never again. This means that your qualified ROTH IRA withdrawals during retirement are completely tax free.
So what does this mean for your 2015 taxes? If you contribute to a Roth IRA this year, the answer is easy. Roth IRA contributions simply aren’t deductible. You are paying taxes on the income now and deferring your tax savings until retirement.
If you contribute to a traditional IRA, then the answer depends on both your income and whether you or your spouse are eligible for a retirement plan at work. If you (or your spouse) are not covered by a retirement plan at work, then your contributions are fully tax deductible. If you (or your spouse) are covered by a workplace retirement plan, then your eligibility for a deduction will depend on your income levels. See if the IRS considers you to be covered by an employer’s retirement plan.
For individuals, you are eligible for the full deduction if your Modified Adjusted Gross Income (MAGI) is $61,000 or less and you are eligible for a partial deduction if you fall between $61,000 and $71,000. For married couples filing jointly, the levels are $98,000 for the full deduction and between $98,000 and $118,000 for a partial deduction.
If you qualify for an IRA, there is still plenty of time to make your 2015 contributions! You have until April 15, 2016 to open an IRA and make a qualifying contribution of up to $5,500 ($6,500 if over 50) for the 2015 tax year.
Reliant Wealth Management can help you decide which plan best fits your long-term financial goals.
Written by: Jordan Walther. Jordan is a financial advisor with Reliant Wealth Management. He serves the North Austin area, including Round Rock, Pflugerville and Georgetown. Send your comments and questions to Jordan@reliantwealth.com or contact him directly at 512-294-3054.