You Have Less Than Two Months to Make Your 2019 IRA Contribution

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You Have Two Months to Fund IRAs for 2018

The stock market has pulled back in the last week. Now could be the time to fund your IRA for 2019, if you haven’t done so yet.

IRA stands for Individual Retirement Account. It’s a special way to save and invest without getting hit by taxes year in and year out.

Did you know it’s still possible to open and fund an IRA for 2019? The deadline is the same as tax day on April 15.

IRAs shelter your nest egg from Uncle Sam until you reach retirement age. With money in a normal savings account, every year brings a new tax bill on the interest earned. A standard mutual fund or brokerage account is similar, with the government taking a cut of your capital gains and dividends each spring.

IRAs avoid all that — or at least delay it significantly. Funds can move between investment options without a single tax event. Dividends roll in. Money can grow in peace without the IRS getting involved.

Traditional IRAs Use Pretax Savings

There are two kinds of IRAs: traditional and Roth.

Traditional IRAs are funded with “pretax” money, so they’re deductible from income now. Capital grows under a tax-free umbrella. You have to leave it there until you’re 59-1/2. When you make withdrawals, IRS charges tax at the ordinary income-tax rate.

This can be useful because your income and marginal tax rate tend to be lower after retirement. As a result, traditional IRAs can have the double benefit. First, money grows tax free for decades. Second you may pay a lower rate when taxes are eventually due.

S&P 500 weekly chart, with 50-week moving average and weekly changes.
S&P 500 weekly chart, with 50-week moving average and weekly changes.

Many savers already have access to 401(k) plans, which are similar to traditional IRAs. Roth IRAs, however, can be more interesting — especially for younger savers.

Roth IRAs Use Post Tax Savings

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 reach 59-1/2.

While we cannot give tax advice, Roth IRAs may have an additional benefit to younger savers. People early 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 ever — no matter how much it grows.

The limit for IRA contributions in 2019 was $6,000, up from $5,500 in 2018. The rules also restrict Roth IRA contributions based in your income, marital status and age. Check with your tax expert for more.

In conclusion, the stock market just had its quickest pullback ever. And, the funding deadline is six weeks away. If you’re looking to put money away for the long-term, now might be a time to think about a TradeStation IRA.

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