Both forms of the IRA are great ways to save for retirement, although each offers different advantages. The biggest issues that tax payers need to keep in mind is how the U.S. Government treats the taxes. If you earn $50,000 a year and put $2,000 in a traditional IRA, you will be able to deduct the contribution from your income taxes (meaning you will only have to pay tax on $48,000 in income to the IRS). At 59 1/2, you may begin withdrawing funds but will be forced to pay taxes on all of the capital gains, interest, dividends, etc., that were earned over the past years.
On the other hand, if you put the same $2,000 in a Roth IRA, you would not receive the income tax deduction. If you needed the money in the account, you could withdraw the principal at any time (although you will pay penalties if you withdraw any of the earnings your money has made). When you reached retirement age, you would be able to withdraw all of the money 100% tax free. The Roth IRA appears to make more sense in most situations. Unfortunately, not everyone qualifies for a Roth. A person filing their taxes as single cannot make over $95,000. Married couples are better off, with a maximum income of $150,000 yearly.
As you tackle your 2012 tax return, make sure you haven’t overlooked one of the best ways to cut your tax bill and secure your future — funding a traditional IRA. (There is no upfront tax break for funding a Roth IRA.)
You can make a 2012 IRA contribution up until the time you file your tax return, due April 15, 2013. Depending on your income, you may be able to deduct your IRA contribution even if you or your spouse are covered by another retirement plan at work. To contribute to a traditional IRA, you or your spouse must have earned income from a job and be younger than 70½.
If you are single and don’t participate in a retirement plan at work, you can make a tax-deductible IRA contribution of up to $5,000 ($6,000 if you are 50 or older) regardless of your income. If you are married…
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