Since it is tax time, I will explain a few benefits from saving and investing your money for retirement that the IRS (Internal Revenue Service) allows, such as the tax benefits of 401K’s, IRA’s and Roth IRA’s.
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Since it is tax time, I will explain a few benefits from saving and investing your money for retirement that the IRS (Internal Revenue Service) allows, such as the tax benefits of 401K’s, IRA’s and Roth IRA’s.
Tax Benefits of a 401K: If the place of your employment sponsors a 401K plan and you invest/put your money into the plan, that amount that you place in a given tax year reduces your taxable income. Example: If you make $82,400 you fall in the 28% tax bracket (just to say these are the only facts that we know, disregarding personal exemptions and standard deductions, etc). Therefore, you owe $23,072 in taxes on that income. However, if you placed $5,000 into your 401K, your taxable income would be $77,400, which falls in the 25% bracket, and you would owe $19,350. You still are keeping the assets that your 401K holds from your money and you also save over $3,700 in taxes for doing so. 401K’s are also great, because most employers will match a certain percentage of what you place in. Also to note – the 401K value will grow tax deferred, meaning you do not pay any taxes on any gains/increases in value until you begin redeeming your 401K.
Traditional IRA (Individual Retirement Account): You currently can do a maximum of a $5,000 contribution to a traditional IRA, or $6,000 if you are over 50. This is very similar to the 401K, because you deduct how much you place into a traditional IRA from your taxable income. One factor that differs is that no one is matching a percentage of what you place in. Similarly to 401K’s, however, is that the traditional IRA grows tax deferred and you only pay taxes when you redeem at a later age.
Roth IRA: Unlike the other two retirement accounts, the amount you place in a Roth IRA is not tax deductible. However, they grow tax-free and when you redeem any portion of your Roth IRA, when allowed, you do not pay any taxes on the growth! The amounts were the exact same as a traditional IRA on how much you can contribute for the year 2010.
The Retirement Saving Credit: If you are single with income up to $27,750, Head of Household with income up to $41,625 or are Married Filing Jointly with income up to $55,500 you may take this credit. You need to be born before January 2, 1992 and could not have been a full-time student during the calendar year and cannot be a dependent on another person’s return (Bummer!). You may be able to take a credit of up to $1,000 if you are single/head of household or $2,000 if married filing jointly. Also, this credit is in addition to other tax benefits to retirement contributions.
There are many tax benefits when you save and invest money for your retirement. It is a great way to build wealth for down the road and you get to save money from taxes. I highly recommend you consult your tax advisor and refer to the IRS website at www.irs.gov.
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