Using IRAs as Part of Your Tax Planning Strategy

Achieving any goal starts with a plan and tackling it strategically. Our financial goals are no different. Tax planning is one aspect of personal finance that we need to keep in mind on the way to hitting our targets. With just over 3 months remaining in the year, now is a great time to assess your tax situation and IRAs are great tools to leverage.

An IRA, short for Individual Retirement Arrangement or Account, is a type of retirement plan that individuals can have and maintain at financial institutions. They offer tax advantages to the individual tax payer. There are several types of IRAs, but the two that we will cover in this article are the Traditional IRA and the Roth IRA. 

Contributions made to a Traditional IRA are made on a tax deductible basis and grow in a tax deferred environment until the individual takes withdrawals. At the point of withdrawal, both the actual contributions as well as any earnings and interest are taxed as ordinary income. If you are looking to minimize your taxable income for the year or if you believe you will be in a lower tax bracket at the point of withdrawal, you can see how this strategy would benefit you. With this type of account, you are required to take mandatory distributions by April 1st of the year after you turn 70 1/2 and if you take withdrawals prior to age 59 1/2, you may be subject to an early withdrawal penalty. 

With a Roth IRA, contributions are made with after-tax dollars and grow in a tax-free environment. Withdrawal of contributions are not subject to taxation, but in order to avoid a possible penalty and tax on withdrawals of earnings, you must be over the age of 59 1/2 and the monies must have been in the account for at least 5 years. Once you’ve reached 59 1/2 and that 5 year marker, whatever you have contributed as well as the accumulated earnings won’t be subject to a tax bill. Imagine how beneficial this would be if you see yourself in a higher tax bracket at the point of withdrawal. 

In addition to the tax benefits of these accounts, they also offer bankruptcy protection and protection from creditors. Let’s stretch our dollars and make sure our money goes a long way by saving money while minimizing tax implications. The contribution limit for both the Traditional and Roth IRAs is $5,500 if you are younger than 50 and $6,500 for those older for tax year 2018. Consider all of your options before moving forward. Set aside an hour this month to review where you are and take action on the steps you necessary to achieve your financial goals. 

We aim to share strategies that are designed to help individuals increase their net worth, increase the value of their estate, and ultimately build generational wealth. Stay tuned where we will discuss Stretch IRAs. If you haven’t heard of a “Stretch IRA”, it’s a way to minimize tax bills for multiple generations.

Disclosure: This article is not to be considered as tax or legal advice. Each individual has unique circumstances that need to be considered prior to executing a tax and estate planning strategy.