More Than An Afterthought
In the last minute rush to finish their taxes, many people
throw in an IRA contribution without much thought. Tax planning in general and
IRAs in particular deserve more care and attention. In growing our assets and
preparing for retirement, we have four major levers: increasing income,
spending less, improving investment results and minimizing taxes. IRAs can be
useful in two of those four categories. Since the huge bear market, it is
generally advisable for most people nearing retirement age to try to increase
their savings. Correctly using the best retirement vehicles is one of the
easiest steps to do this. Choosing which types of accounts to use is important
and varies with each person’s needs. For starters, using a Traditional IRA
provides a front end tax deduction for those eligible. Establishing a Roth IRA
doesn’t provide the initial deduction, but in most circumstances earnings from
the Roth come out tax free.
Traditional
IRA distributions are taxed at the ordinary income tax rate.
Further, Roths don’t have a required minimum
distribution after age 70 ½ as do Traditional IRAs. Getting these choices right
and not running afoul of the complex rules can make a huge difference in how
much money you accumulate.