A big part of retirement planning is tax planning. When you save and invest money for retirement, those funds are still part of your overall financial picture. Getting input from a tax planning expert along the way can help ensure that you understand the tax implications of your retirement strategy.
Retirement Saving and Investing: IRAs
One of the most popular vehicles for retirement saving and investing is the IRA (Individual Retirement Account). There are two main types of IRAs: a traditional IRA and a Roth IRA. Both are designed to help you save money and grow your investment for use in retirement; however, they function slightly differently when it comes to taxes.
When you contribute to a traditional IRA, you can take a deduction on your taxes for the amount that you invest (up to a certain limit). This means you don’t pay taxes on the part of your income that you put into your retirement account. Some people find that this saves them money in the short term because they’re not paying taxes on money that they’re putting away for future use.
When you reach retirement age and take the money out, though, you have to pay taxes on it at that time. Contributing to a traditional IRA doesn’t absolve your tax liability—it simply defers it until the funds are dispersed.
The Roth IRA works a little differently. The money that you put into a Roth IRA is counted as part of your taxable income for that year. You pay tax on it before it goes into your retirement account. Once it’s in there, though, you don’t have to pay capital gains tax on it. And, when you reach retirement age and take the money out, you don’t have to pay taxes on the funds you contributed.
There are numerous factors to consider when making decisions about retirement planning. To make sure that you’re looking at all the tax-related angles, consider setting up an appointment with a tax planning expert.
The team at Taxation Solutions, Inc. can help individuals and families in Cincinnati navigate the tax implications of various retirement savings options so you can make informed decisions about how to save. Call our team today to set up an appointment!