70% of Households Are Missing Out on This Important Tax Break
Where does this free money come from? It comes from a tax break for making annual contributions to a traditional IRA. Provided that your taxable income isn't too high, you can claim a tax deduction of up to
So, how can you claim this tax break? Do two things: Open a traditional IRA and make the maximum contribution. Read on to find out why it's so important to have an IRA and how to do both tasks.
Image source: Getty Images.
Why is it so important to have an IRA?
Opening an IRA is important because IRAs and 401(k)s are the two primary retirement accounts offering tax breaks for retirement. While not everyone has access to a workplace 401(k), almost anyone can open an IRA and make tax-deductible contributions.
If neither you nor your spouse has a workplace retirement plan, you can contribute to an IRA regardless of your income. If you or your spouse have a workplace plan, eligibility for IRA deductions phases out if you earn too much. You can check out the specific income limits, but unless you make at least
Tax breaks are available for investing in two different kinds of IRAs. A traditional IRA gives you a break upfront in the form of a tax deduction the year you invest. A Roth IRA gives you a tax break during retirement. You invest in a Roth IRA with after-tax dollars, but withdraw funds tax-free as a senior.
The tax savings you'll enjoy is substantial when you invest in either IRA, but immediate tax savings from a traditional IRA makes it more affordable to save now. This table shows how much your tax break is worth for IRA contributions under different circumstances.
Tax Rate
10%
12%
22%
24%
32%
$2080
35%
$1925
37%
$2035
Table calculations: Author
Of course, the tax break isn't the only reason to invest. Your IRA should provide a generous nest egg. Consider how much your IRA could be worth if you invest
Age You Start Investing
IRA Balance at 67
30
35
40
45
55
Table calculations: Author.
With the government subsidizing your investment, saving
Here's how you open an IRA
If you've determined you can make tax-deductible contributions, it's time to open an account. You can open an IRA with brokerage firms, mutual fund companies, banks, or roboadvisors.
* Brokerage firms give you the widest choice of investment options and you can find discount brokers online with very small fees to buy and sell investments. You can invest in individual stocks, mutual funds, exchange-traded funds (ETFs), and other assets -- but you'll need to be comfortable making your own investment choices. There are simple approaches to building your own portfolio of investments that will allow you to minimize fees and balance risk.
* Roboadvisors such as
* Banks and mutual fund companies provide much more limited investment choices so often aren't the best option.
Opening an IRA online with a discount broker or roboadvisor takes only minutes. You'll need to input your personal identifying information, including your
Once you've put money in, you can purchase investments in your brokerage account or your roboadvisor will select investments for you. If you're not sure where to start, check out some model portfolios or tips for investing in the stock market if you can't pick stocks.
Here's how you can max out IRA contributions
Once you've got your IRA, max out contributions to get the maximum tax benefits, and save enough for a secure retirement.
To invest
A side gig could also be an option. More than 44 million Americans have a side hustle, and almost 40% of those with side jobs earn more than
Whether you decide to cut your budget or increase your income, automating contributions to your IRA is a helpful way to hit target goals. Determine how much you can contribute and set up automatic contributions on payday, so money moves to your IRA before you get a chance to spend it.
Don't miss out on a valuable tax break that makes it easier to invest in your future
If you're in one of the 70% of American families not currently investing in an IRA, you're missing out -- but you can change that. Now you know how to open an IRA and can open one today. Even if you can't contribute
The
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "
The Motley Fool has a disclosure policy.
___
(c)2018 The Pantagraph (Bloomington, Ill.)
Visit The Pantagraph (Bloomington, Ill.) at www.pantagraph.com
Distributed by Tribune Content Agency, LLC.
Sen. Warren Introduces Bill to Cap Prescription Drug Cost-Sharing
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News