A retirement tax deduction is a silver lining in the current turbulent and cloudy market.
Not all retirement plans offer a tax deduction, but it’s a benefit some taxpayers can take advantage of for their 2008 tax returns right up until April 15.
Looking to discover the tax-saving differences between these retirement plans before it’s time to pay Uncle Sam?
MainStreet spoke to Robert Seltzer, a certified public accountant and personal financial specialist to get the insight on the Individual Retirement Accounts, or IRAs, about the different tax advantages of a traditional IRA and a Roth IRA.
MainStreet: What are the differences between a traditional IRA and ROTH IRA?
Robert Seltzer: A traditional IRA allows you to receive a tax deduction and the account goes tax deferred and you don’t pay taxes on it until you take a distribution. A Roth IRA is tax free. If you have a long time before you’re taking the money out, and you can afford to forego the current deduction you’re going to have a much greater tax savings [with a Roth IRA].
MS: What type of IRA are taxpayers eligible for?
RS: It depends on your income and whether you’re covered by a plan at work. If you have a 401(k) there would be an income ceiling. If not, there is no income ceiling.
MS: What is an income limit based on?
RS: The amount is based on the adjusted gross income.
For a traditional IRA, [if] you’re not covered by a pension plan, then there is no income limit. [A 401(k) is considered a pension plan.] If so, there is $53,000 limit for individuals and $85,000 to $100,000 for married couples.
To invest in a Roth IRA, the income is $101,000 to $116,000 for an individual. For married people, the requirements are income of $159,000 to $176,000.
MS: What is the maximum contribution to both types of IRAs?
RS: There is maximum contribution of $5,000 for 2008. If you’re 50-years-old or older, you can put an additional $1,000 into a retirement account.
MS: How does a $5,000 investment grow in an IRA?
RS: If we assume you get a traditional return, your money may double every nine years. If you have 36 years to retire, your money may double five times. That $5,000 will go from $10,000 to $20,000 to $40,000 to $80,000.
MS: If eligible, what steps should taxpayers take to ensure their deduction is included?
RS: If [an IRA contribution] was made in 2008, take the account statement to your tax preparer or CPA. If you haven’t funded an IRA yet and you are not sure if you’re able due to financial reasons or eligibility, I would put a note simply saying ”2008 IRA?” and that would serve as a reminder to bring the issue up with your tax person.