Reducing your taxable income should be an ongoing, year-round objective. One of the most effective and prudent ways to do this is by saving for retirement. Investing money in a qualified retirement account allows you to defer taxes on your contributions and earnings until retirement, when you may be in a lower tax bracket.


In addition to taking advantage of retirement opportunities through your employer, you should consider boosting your savings with another tax-friendly investment vehicle; the Individual Retirement Account, or IRA. Depending on your income and participation in an employer-sponsored retirement plan, your contributions to a traditional IRA may be tax deductible. Potential earnings grow tax deferred.


Unlike traditional IRAs, Roth IRAs offer no tax deductions for contributions, but potential earnings grow tax free. After reaching age 59½ and owning your account for five years, you may withdraw money tax-free.


The total amount you are allowed to put into an IRA, or a combination of IRAs, is $5,500 for 2015. If you are age 50 or older, you may contribute an additional $1,000. You are eligible to make a full contribution to a Roth IRA for 2015 if your income does not exceed certain limits.


In 2010, the adjusted gross income (AGI) ceiling on converting traditional IRAs to Roth IRAs was eliminated, allowing more taxpayers to take advantage of the Roth IRA through direct contributions or conversions. When converting, the distribution from your traditional IRA is taxed, but you aren’t penalized for the early withdrawal.


Because IRAs are designed to help investors save for retirement, penalties may apply if you withdraw funds before you reach age 59½. But, if you tap your IRA early to pay for qualified college expenses or to fund up to $10,000 of a first home purchase, you will not be penalized.


Which IRA is best for you? If you are fairly young, expect to be in a similar tax bracket when you retire, or are concerned about cash flow in retirement, the Roth IRA may be the way to go. If, on the other hand, you are older and expect to be in a lower tax bracket at retirement, you may be a candidate for a traditional, deductible IRA.


Either way, remember that your earnings have the opportunity to grow without being reduced by current taxes. Over time, this can mean significant savings.


If you have questions about saving for retirement call Cruise & Associates today for a free consultation.


*This information should not be considered as tax/legal advice. You should consult your tax/legal advisor regarding your own tax/legal situation