Most people know tax day is less than two months away. But did you know it’s also the deadline to fund an IRA?
Individual retirement accounts are a special way to save. It’s a little ironic the deadline is April 15 because their whole purpose is to save you money on taxes. Their benefits can really add up over time.
Simply put, IRAs shelter your nest egg from taxes each year. With money in a normal savings account, every year brings a new tax bill on the interest earned. A normal mutual fund or brokerage account is similar, with Uncle Sam taking a cut of your capital gains and dividends each spring.
IRAs get rid of all that — or at least delay it in a big way. Funds can move between investment options without a single tax event. Dividends are received. Money can grow in peace without the IRS getting involved.
There are two kinds of IRAs: traditional and Roth. (Not sure who Roth was, but you gotta love him or her.)
Traditional IRAs are funded with “pretax” money, so they’re deductible from income. Capital grows unmolested over the years, and can be taken out once you’re 59-1/2. Only at that time are there any taxes. You’ll simply pay the ordinary income-tax rate on withdrawals.
The logic is that your income tends to be lower after retirement. Therefore your marginal tax rate will be lower than your peak working years. So you potentially benefit by paying the lower rate down the road.
Lots of savers already have access to 401(k) plans, which work pretty much the same as traditional IRAs. Roth IRAs, however, can be more interesting — especially for younger savers.
Roth IRAs are funded with post-tax dollars and you never pay tax on their gains. (The main exception is for early withdrawals.) Put the money in now, move it between investment options when you need, and then start enjoying it when you’re 59-1/2.
While we cannot give tax advice, the Roth IRAs are may offer an additional benefit to younger savers. After all, people earlier in their careers probably make less money, and therefore pay less income tax. That means the post-tax money going in was probably taxed at a lower rate than you’ll pay later in life. Once the funds are put away, there won’t be any taxes after that!
There are limits on contributions to IRAs: $5,500 last year and $6,000 this year. The good news is that you can make 2018’s contribution all the way up to April 15, 2019! Of course, you can also contribute for the current year (2019)… or do so at any point before April 15, 2020.
Stop putting it off. Now’s the time to time to start funding your retirement.