By Douglas J. Sinclair June 11, 2022
An Individual Retirement Account (IRA) is a type of personal savings account, that you setup with a financial institution, often with the aid of a financial adviser. A Traditional IRA comes in two types, Deductible and Nondeductible, and each type allows the owner to plan for their future while also benefiting from some tax saving benefits. The Traditional IRA is also one of the first and one of the most popular types of retirement account because of its status as a tax deferred savings account.
This means that you normally do not pay income taxes on your contributions, and only pay taxes on your money later when you make withdrawals in retirement. Due to contributions, you make from eligible income generally being tax deferred, any interest payments, capital gains, and dividends you receive are able to compound while being unfettered by income tax as your account continues to grow.
Your income and whether you or your spouse are covered by an employer retirement account typically determines whether you are able to take advantage of a full or partial tax deductible.
Example:
Janice is single 29 years old and has just recently received a raise bringing her annual income up to $47,000. Based upon her marital status and lack of employer retirement plan if she is able to keep her income beneath the $66,000 threshold, she knows she will be able to claim a full deduction for her maximum contribution limit of $6,000.
In June of 2022 Janice marries David, and David has an income that is a greater than hers. Janice will need to make an appointment with her tax advisor to determine whether any or all of her contributions will be able to qualify as being tax deductible.
Written by Douglas J. Sinclair
Rock Hill SC and Charlotte NC
June 11, 2022