IRA Savings

When you contribute money to a Traditional IRA, you may be able to deduct that amount from your taxable income for the year. 

For example, if you earn $60,000 in a year and contribute $5,000 to your Traditional IRA, you may be able to deduct that $5,000, reducing your taxable income to $55,000. This deduction can lower your overall tax bill for that year. 

The ability to deduct your contribution may depend on factors such as your income level, filing status, and whether you or your spouse are covered by a retirement plan at work. 

The investments within your Traditional IRA can grow without being taxed each year. This includes any interest, dividends, or capital gains that your investments earn. 

Taxes on these earnings are deferred until you withdraw the money from the IRA, typically during retirement. 

Deferring taxes allows your investments to compound more effectively over time, potentially resulting in greater growth compared to if the earnings were taxed annually.  

You should always consult your tax advisor to help you determine what is best for your situation. Often, the simplest way for a person to decide between a Traditional IRA and a Roth IRA is to consider their current and future tax situations. Here’s a straightforward approach: 

Current vs. Future Tax Rate: 

Traditional IRA: Choose this if you expect your tax rate to be lower in retirement than it is now. Contributions are tax-deductible, which reduces your current taxable income. Withdrawals in retirement are taxed as ordinary income. 

Roth IRA: Choose this if you expect your tax rate to be higher in retirement than it is now. Contributions are made with after-tax dollars (no immediate tax deduction), but withdrawals in retirement are tax-free.