Planning for your retirement is important – it should never be put off!  It’s even more important to understand which plan works best for you and to investigate how it will affect you when it’s time to file your tax return. While there are many different types of retirement accounts you can choose from, the most popular are traditional IRAs, Roth IRAs or 401(K)s. Always keep in mind when choosing a plan that retirement typically lasts around 30 years, and with the cost of living going up every year, the right plan can be one of the most important decisions you will ever make. Before you decide which plan to open, make sure to investigate both the pros and cons from a tax standpoint.

Traditional IRA

A traditional is one of the most common IRAs and is an individual retirement account that allows your earning to grow while being tax-deferred. This retirement account allows taxpayers to receive a tax deduction for money they put aside. The money that you put into your IRA, as well as the investment earnings you receive on contributions, will not be taxed until it is withdrawn at retirement.

Roth

IRA Roth IRAs are considered a special type of retirement account. If you qualify for this type of IRA, you are allowed to make contributions that have already been taxed.  With Roth IRAs, you are not able to deduct contributions. Later on down the road, taxpayers will see tax benefits such as the qualified distributions from their Roth IRA will be tax-free and will not be included in taxable income.

401(K)

This type of retirement plan is an employer-sponsored contribution plan. It allows eligible employees to save and invest for their retirement on a tax-deferred basis. The benefits of having this plan are that contributions are usually made with pre-taxed dollars and you won’t have to pay taxes until you withdraw your funds.

There are many retirement plans out there for you to sign up for. It is advised that you do your research and investigate which plan best aligns with your lifestyle and current financial status. It is beneficial for all taxpayers to look into a retirement plan to invest in, in order to prepare for future retirement and to have an additional source of income when you do end up retiring.

 

The content contained on this page is strictly for informational purposes and may not apply to your specific situation. We recommend you consult with a tax professional to evaluate your unique situation. Forward Tax does not provide tax, bankruptcy, accounting or legal advice.

Posted in Retirement, Taxes