How to lower your taxes to prepare for retirement
People often think more about retirement planning this time of year, as the tax filing deadline approaches. That’s because the IRS gives you until April 17th, 2012, to make a tax-deferred contribution for 2011 to your IRA. At CompleteTax.com, we offer a full range of tax resources and tips for tax return help so you can legitimately lower your liability and e-file taxes.
One way is through the IRA, or Individual Retirement Account. The IRA is a place for your investments to grow until you are eligible to begin taking withdrawals; only then are you taxed. When you make a contribution for 2011 – up to $5,000, plus an additional $1,000 if you are at least age 50 – that contribution lowers your taxable income and ultimately your tax liability. Contributions must be made from earned income. If you are married filing jointly and your spouse does not work, your earnings can also cover his/her contribution. Income limits apply and are based on modified adjusted gross income and/or whether you or your spouse participated in an employee retirement plan. You must begin taking withdrawals shortly after the age of 70 1/2, when you are no longer able to contribute.
Because the IRA is meant for retirement, there is a heavy 10-percent distribution penalty for withdrawing before age 59 1/2. This is in addition to the ordinary taxes that will be imposed. A few exceptions to bypassing the penalty exist and may involve exorbitant health expenses, job loss, disability, higher education, first home and/or qualified reservist status.
For those who would like a bit more flexibility in withdrawing their money – at least after five years from opening -there is the Roth IRA. The tax benefits are not immediate, though. With the Roth, you are not taxed upon withdrawal in the future, but the money you contribute is taxed now, according to your current tax bracket. If you are interested in lowering your current tax liability, choose the traditional IRA.
To see if you meet the requirements for opening an IRA, visit CompleteTax.com for our well-stocked virtual library of tax resources.
