A pathway to retirement and tax savings for many taxpayers is an Individual Retirement Account (IRA).
Everyone under 70 ½ by the end of the tax year who has taxable compensation can contribute to an IRA. Compensation for IRA purposes includes:
- Wages, salaries, etc
- Self-employment income
- Taxable alimony and separate maintenance
There are many options for where to an open IRA, from your local bank to an investment broker and includes many investment options as well, such as certificates of deposit, stocks, bonds and more.
Unique to traditional IRA's is the ability to make and designate a contribution for the prior tax year as long as the contribution is made before the tax filing deadline - usually April 15. If eligible, a contribution to a traditional IRA may be deductible on your tax return, helping to reduce your tax liability.
The most that can be contributed to a traditional or Roth IRA for a taxpayer is the smaller of:
- Your taxable compensation
- $5,000 for 2009 ($6,000 for 2009 if 50 or older)
Distributions from a traditional IRA are taxable. This is one of the primary differences between a traditional and a Roth IRA. With a Roth IRA, qualified distributions are not taxable. Likewise, Roth contributions are not tax deductible.
For more information about Individual Retirement Accounts (IRA's), review IRS Publication 590, Individual Retirement Arrangements or discuss your situation with your Tax Professional and/or see Liberty Tax Service's Tax Tips.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.