Wealth CAP is a retirement plan company that believes in the use of IRAs (individual retirement accounts) to help diversify your retirement portfolio. We specialize in dynamic bucketing portfolios (DBPs), which uses market investments, alternative investments, and safe investments to help you see the most gains, get the most security, and have the most liquidity, which is important when emergencies or other unexpected events happen in life. In our IRA series, we’ve been discussing what are IRAs, the types of IRAs, including self-directed IRAs, and how to use IRAs in your retirement plan. Today, we’ll discuss the tax benefits of IRAs. Contact Wealth CAP today to get started!
TAX BENEFITS OF IRAS
We all know the saying: the only certainties in life are death and taxes. Death we can’t avoid and although we can’t completely avoid taxes, we can do things to minimize our tax liabilities. One of these is investing in IRAs. IRAs were created by the federal government specifically to help you retire (and, let’s be honest, to reduce the government’s tax liability as well through social security and other government retirement obligations). In an effort to make these new products at the time attractive to people, the federal government wrote great tax benefits into IRAs. The tax benefits are so good, IRAs continue to grow to this day, with more than one-third of all US households owning at least one IRA in 2016. Below are the tax advantages IRAs offer.
- Tax deductible. Money contributed to an IRA can be deducted from your income, up to $6,000 per year in 2019 or $7,000 if you’re over the age of 50, depending on your level of income and if you participate in an employer-sponsored retirement plan. Now, that may not sound like a big deal, but here’s one example to illustrate the tax savings: if you’re in the 28% federal income tax bracket (around $100k in annual income if single or $165k in annual income when married), you’d save $1,680 in income taxes with an annual $6,000 IRA contribution. That’s a nice weekend vacation, your child’s soccer fees, or your gym memberships for a year.
- Tax-deferred earnings. All earnings or growth of your funds in all IRAs are tax-deferred, meaning the monies grow with no income tax taken out until you take a disbursement from your IRA. This may not sound like a big deal, but with the time value of money and compounding, these funds can keep growing on top of each other for years, or even decades, adding up to thousands of dollars in the long-run. Let’s take a look at another example to illustrate the power of tax deferred growth: If you invest $100,000 in a taxable account for 30 years, you’d garner about $661,000 at a respectable 6.5 percent average growth rate. That’s nice, right? If you invested that same $100,000 in a tax-deferred account for 30 years at ten percent growth rate, your investment would be worth $1.7 million dollars. That’s almost an extra $1 million! Think about what you could do with that money. Granted, this is for 30 years and the ROI is an average. However, tax-deferred earnings can add up quickly no matter your time and ROI.
- Lower Adjusted Gross Income (AGI). When you contribute to an IRA, your adjusted gross income is adjusted, which helps with itemized deductions. This could also affect your tax bracket if you are close to the cut-off. This can be applied to medical expenses as an example, which would probably only be in the hundreds of dollars, but every little bit counts.
- Growing money for up to age 70 ½. The federal government has extended the time you have before you have to take minimum distributions from your IRA. This is due mainly to the fact Americans are living longer. Hence, if you take no distributions until age 70 ½, that gives the time value of money only more time to grow at tax-deferred rates. As we’ve seen, this can add up quick. For example, on $200,000 at a 10 percent growth rate for 5 years, you’d see an extra $137,000 — no chump change by any means.
- Additional retirement savings at tax-deferred rates. IRAs are not only for use during retirement, but can also be used as an investment/savings instrument itself. Using IRAs for growth purposes can help you stretch your retirement savings to last for the rest of your life. You can also utilize nondeductible contributions if your income exceeds the contribution limits, which will enable you to still earn income tax-deferred.
- A place for rollovers. If you have an employer-sponsored retirement plan, odds are you will leave that employer at some point. With an IRA account, you can rollover your other retirement funds and reap the tax benefits of IRAs. An IRA usually has more investment options than typical employer plans, enabling you to take advantage of a higher rate of return overall.
Most people know IRAs can help ease their tax burden. However, that’s usually where the knowledge stops. IRAs can be complicated instruments, and a tax professional or a financial planner knows the ins and outs of IRAs, saving you the time to learn it all.
Wealth CAP is a retirement planning company that will help you evaluate your goals for retirement, calculate the amount you will need, and formulate a plan to get there. Our dynamic bucketing portfolios (DBPs) offer the most flexibility and versatility to take advantage of changing market conditions. Through the right combination of market investments, alternative investments, and safe investments, Wealth CAP will tailor your portfolio to help you maximize your gains in a secure and liquid way. We have years of investing, marketing, and managing experience. We help individual investors as well as companies develop the right retirement strategy and retirement income plan. We have no hidden fees and work exclusively on a monthly fee, regardless of the number of transactions you do. We’re fully transparent and accountable to you. We’re here to answer any of your questions at any time. Contact us today for a free consultation!