Utah Income Planner Explains How to Save on Taxes by Contributing to an IRA

With taxpayers looking to reduce what they owe, advisers at New Millennium say contributing to a retirement account is one of the best ways to slash tax bills

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Would you rather give your money to Uncle Sam or put it toward your future retirement savings? An IRA is one of the best ways to invest in your future.

Salt Lake City, UT (PRWEB) March 27, 2012

With the April 17 tax filing deadline only a few weeks away, taxpayers are looking for ways to cut their tax bill. According to a spokesperson for the IRS, making a contribution to an IRA is one way to do this and generate retirement savings at the same time. IRA contributions can be made for the 2011 tax year and be deducted from your taxes until the filing deadline.

Contributions to IRAs are at the highest this time of year because of the advantages they present at tax time, said Derek Overstreet, president of New Millennium Insurance Services in South Jordan, Utah.

Fifty percent of all IRA contributions are made within 28 days of the tax filing deadline, according to Fidelity Investments.

“Now is an excellent time to contribute to an IRA," Overstreet said. “Would you rather give your money to Uncle Sam or put it toward your future retirement savings? An IRA is one of the best ways to invest in your future.”

An IRA is an excellent way to reduce overall income, resulting in a decrease to your tax liability.

“Do you want tax-free money or taxable money?” Overstreet asked.

The return on an investment into an IRA account can be substantial. For example, putting away $5,000 a year for 20 years with a total contribution of $100,000 and an 8 percent average return will grow to $247,000.

There are several IRA accounts to select from. According to Overstreet, most individuals select a Roth or Traditional IRA. With the Roth IRA, contributions are made with after-tax dollars and withdrawals are generally tax free. Any transaction done within the account has no tax impact. The Roth IRA is one of the most popular choices in IRA’s because it offers:

  •     Tax Free Growth: Income tax will not be charged on these earnings if you have the account for a minimum of five years and are at least 60 years old.
  •     Tax Free Withdrawal Process: Account contributions can be taken at any time and are tax free.
  •     No Minimum Withdrawal: A Traditional IRA or 401(k) requires a minimum distribution of funds, there is no requirement with a Roth IRA.
  •     Inheritance Benefits: Beneficiaries can receive assets from your account after death.
  •     Multiple Account Options: A Roth IRA can be set up in addition to other retirement accounts.

Contributions to Traditional IRAs are made with pre-tax dollars and have no tax impact, but withdrawals at retirement are taxed as income.

The IRS limits the size of IRA contributions. The maximum contribution is $5,000 or $6,000 for those older than 50 years of age. Individuals older than 70 years of age are prohibited from making contributions.

According to the IRS spokesperson, if contributions to an IRA for a year were more than the maximum contribution, individuals may apply the additional contribution to a later year, but an additional tax or penalty may be incurred.

Once money is in an IRA account it can be used for investing in stocks, bonds and mutual funds. Through a self directed IRA investments can also be made in real estate, precious metals and gems.

Funds from an IRA account may be distributed any time, but the withdrawal might come with penalties. Generally, money can be withdrawn after the IRA owner reaches age 60 as penalty-free taxable income. After age 71, non-Roth owners must start taking a minimum amount.

A Roth IRA gives individuals a chance to diversify their investments. Those who make investments within a 401(k) may also invest in an IRA. It may even be a great opportunity to make up for a retirement contribution you hoped to make in the past. The traditional IRA and 401(k) investments are taxable when withdrawn, but with the Roth IRA it could be tax free. Being aware of potential tax benefits may result in major savings and reduce your tax liability. Tax time can also serve as a great reminder to reexamine your retirement plan and potentially enhance your long-term financial security, Overstreet said.

A retirement planning expert like New Millennium helps make those preparing to retire aware of their various tax options and in identifying retirement planning needs. Learn more at http://nmutah.com/.