Tax Season Approaching

With tax season approaching, I wanted to share information about a tax-advantaged retirement account that everyone receiving taxable compensation in 2014 can fund.  You have until April 15 to make an Individual Retirement Account (IRA) contribution of up to $5,500^[1] for the 2014 tax year.

Accounts and Eligibility

There are two types of IRAs -- Traditional and Roth.

You can make a full Roth IRA (post-tax) contribution if your individual* 2014 Modified Adjusted Gross Income (MAGI)^[2] is less than $114,000 -- or a partial contribution if it’s between $114,000 and $129,000.

*Married filing jointly:        2014 Roth income limit threshold is between $181,000 and $191,000

                        2014 Traditional income limit threshold is between $96,000 and $116,000

                        Contribution limit of $11,000 (two individual IRAs of $5,500 apiece)

                        MAGI figures provided below are based on an individual tax filer

You can make a full Traditional IRA (pre-tax) contribution if your modified AGI is less than $60,000 -- or a partial pre-tax contribution if it's between $60,000 and $70,000.

Roth IRA

The appeal of the Roth IRA is the ability to invest after-tax money so that it grows tax-free over time, and then you use that money in retirement.  Besides compounding tax-free, all withdrawals are tax-free, unlike a Traditional IRA or standard 401(k) account.  You also have the option to withdraw your initial contributions at any time without penalty, not that it's advisable to, but having that flexibility makes the account more attractive.

An underlying principle of a Roth IRA is that your tax rate now would be lower than your tax rate later.  Therefore, receiving tax benefits later will be of greater value than experiencing tax benefits now.