The Tax Benefits to Opening an IRA Account
It’s generally understood that to have and invest in an IRA account is advantageous in more ways than one. Tax benefits are a major incentive; but what exactly do those benefits entail? Even if you’re already on an employee-sponsored retirement plan, setting up a self-directed IRA account provides a significant array of investment opportunities.
Depending on your income, your annual contribution to your IRA can be as high as $5,500, or $6,500 if you’re aged 50 or older. Those annual contributions will continue to grow in investment income until you can begin withdrawing money from your IRA at the age of 59½.
- Immediate Effect: Annual Contribution Tax Deduction
In some cases, these contributions can be tax-deductible, saving you hundreds of dollars on your federal income tax return. Plus, those IRA contributions also lower your adjusted gross income (AGI), which can consequently alter which tax bracket you fall into.
- Over Time: Investment Earnings Tax Deferral
Even if your income exceeds the contribution limits and your contribution is not tax-deductible in the year it’s made, you can still accumulate tax-deferred growth from it. Over time, this can significantly improve your return on investment.
- Additional Savings: 401(k)s and Employer-Sponsored Plans
If you have an employer-sponsored plan, you can still contribute that $5,500-$6,500 annually in addition to the funds you’re putting into your 401(k). On top of that, when you leave an employer, you can use your self-directed IRA account to roll your employer-sponsored plan into.
- Withdrawal: Investment Income Up to Age 70½
When retirement comes around the corner, you still have some time left to milk your IRA for all it’s worth. Though you can make withdrawals as early as 59½, you have the option of waiting until the age of 70½ and continue to allow tax-deferred investment income to accumulate in your IRA.
So regardless of your age or income, the tax benefits of opening an IRA account are yours for the taking.