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Yes, I know, everyone
wants to know all about IRA’s... Well maybe not, but I’ll
try to make this as painless as possible. There are a few
things you need to know to get started. Here are the
basics.
The Government wanted
people to save for retirement so they decided to give them an
incentive to do this. One of the incentives was a tax
benefit if you invested your money in an account which you
wouldn’t withdraw from until you’re old enough to retire-
This is an Individual Retirement Account (IRA). Although
there are other reasons you can withdraw from this account (talk
with your tax advisor), it is intended for retirement.
There are two kinds
of IRAs- the first is the traditional the second is the Roth
IRA. The traditional IRA reduces your taxable income.
Taxable income you ask? Lets just say that the Government
pretends you make less then you do. This means you pay
less tax. To give you an example - if you put $4000 in an
IRA depending on how much you make, you could be saving between
$400 and $1400 on your taxes. That is the extra money
you’ll receive if you’re getting a refund or you’ll have to pay
that much less if you owe taxes.
The second kind of
IRA is the Roth IRA. This IRA differs because you get the
tax benefit when you withdraw from the account. The
advantage is withdrawals are not taxed.
The best way to think
of a Roth is to look at it as an investment. When you
invest money, it is assumed you are going to make money on the
investment. The monies made on investment are then taxed.
This doesn’t happen with a Roth IRA. If you invest $4,000
in this IRA and 20 years from now that amount is worth $20,000,
you won’t have to pay any tax on the $16,000 when you withdraw
this amount from your account. The down side is you
get no tax benefit for the current tax year, it’s only when you
cash it in.
There are other rules
involving IRAs and On-the-Mark tax service can help you choose
what is best for you before the start of tax season. Any
information you provide is confidential and advice is given free
of charge. Contact me at
mark.dent@otmtax.com.
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