One key factor that you should always put into consideration whenever you are making investment strategies is how the strategies are going to affect your taxes. There are still lots of factors that are involved and need to be kept in mind, and in all this, your least expectations is to make investments that will demand of you to pay huge amounts of taxes that will weigh down heavily the general value of the investments you make.
IRA are traditional investment accounts meaning this is the money you get your hands on after a good numbers of years. And with that in mind, the last thing you would want is to have all your retirement money falling into the hands of the government and leave you with nothing. And this urgently calls for your complete understanding of how making IRA contributions will affect your taxes for you to be on the safer end.
To begin with, a traditional IRA has a tax limit that is deductible. This means that when you submit your contributions to your traditional account with IRA, you are at liberty to make claims for deductions of the money you contribute if at all you and your better half have an active participation in making the investments ( this basically means that if your spouse won’t make any contribution to the IRA account, there is no possibility for you to pay twice the contribution whenever you are using both of the accounts).
However, you should note that you cannot make deductions for all of your contribution from the net income. To get an accurate figure of the exact amount of contribution you are able to deduct, you have to know your overall filing status as well as your modified adjusted gross income. As soon as you’ve gotten this, you can now easily determine how much deductions you can make to pay your taxes from your net income.
As of now in 2014, if you are in the age bracket of 49 and below, you have the right to deduct as much as $5,500 from your net income but if you are 50 and above, you can get upto $6,500. Any amount of cash you pay as contribution to your retirement account is always above the amount that is allotted and it is categorized as income.
Apart from the extra money you send to your IRA account, you are not going to experience any kind of strains when feeding your traditional IRA. Although you should understand that when you are making withdrawals from your account, you will have to pay taxes. But the good thing about this is that you no sort of paperwork is going to be required when withdrawing your money. All that is needed is just for you to get your 1040 or the 1040A form and basically fill in the information that is needed directly.
When it is time for you to withdraw the money from your account, the income that was not taxable back then is now taxed. And if you were to pay tax for all the money in the account, your retirement fund will greatly depreciate. And that is why you will only be taxed on every withdrawal you make.
Whatever the amount you withdraw, that exact sum of money is considered as income and will be taxed like it. You need to be completely aware of what tax bracket you are in because all the money you end up paying as tax solely depends on what category you fall into. If you don’t want to be overcharged for having slightly higher amount of money in your account, you should be keen on the amount in your account.
Photo by Alan Cleaver / CC byPosted on May 5, 2023