401K & IRA Contribution Tax Deductions
Retirement planning isn’t necessarily the most fun activity. However, early, careful consideration of your financial future is critical to establishing a comfortable and secure lifestyle later down the line.
When it comes to retirement savings accounts, you have options. Two popular plans include the Traditional IRA and the Roth IRA. Here, we’re going to talk about the options for you (and your spouse) and how to choose the best option for you.
What is a Traditional IRA?
If you’re trying to maximize your income now, a Traditional IRA may be the way to go. A Traditional IRA is an individual savings account that allows you to delay tax payments until you withdraw funds during retirement. Another major tax benefit: contributions to a traditional IRA are fully or partially deductible on your taxes. What this means is contributing to a traditional IRA will either get you a bigger tax refund at the end of the year or increase your normal paycheck during the year.
Traditional IRA Tax Deduction Requirements
While everyone can open and contribute to a traditional IRA, not everyone is permitted to withdraw funds from one. Additionally, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work.
Traditional IRA Tax Deduction Limitations
For the 2023 tax year, the IRS has set the contribution limit at $6,500 if you’re 49 years of age or younger, and $7,500 if you’re 50 or older.
Another important limit to keep in mind: you can’t contribute to your traditional IRA after the age of 70 ½ years of age. You are also required to start withdrawing distributions, i.e., required minimum distributions, at the same age.
Critical consideration: if you do want to withdraw money from your traditional IRA before you are 59 ½ years of age, those withdrawals will be taxed as income and incur a 10% penalty (unless you qualify for an exemption).
What is a Roth IRA?
Think of a Roth IRA as the opposite of a traditional IRA, tax-wise: while there are no tax savings for putting money into a Roth IRA (i.e., contributions to a Roth IRA are not tax-deductible), contributions in a Roth IRA grow tax-free, and withdrawals during retirement are not taxed. In other words, if you’re betting your income and tax rates will be higher when you hit retirement age, a Roth IRA will save you more money in the long run.
With a Roth IRA, one of the big perks is that you can withdraw money tax-penalty-free, whenever you want. Note however that you may be taxed or penalized if you withdraw your investment earnings. Visit the IRS’s site for a comprehensive discussion of how a Roth IRA works.
Roth IRA Tax Deduction Requirements
The biggest limitation with a Roth IRA is that once you make over a certain amount of income per year, your contributions reduce, and after a certain threshold, you can even become ineligible.
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As an independent contractor, driving for an on demand economy company gives you the ability make money with your extra time. Drive during your lunch break, at night, or during busy weekends – it’s up to you. However, these companies don’t only provide taxi-style services; companies like HopSkipDrive enable the driver to chauffeur kids to their activities around town, similar to a nanny. Other rideshare companies allow the individual to use their vehicle to make extra cash by renting it out or sharing a ride to work. If you have a car, then there’s an on demand economy opportunity out there for you.
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Freelancing allows individuals to work wherever they want, whenever they want, with whoever they want. Freelance occupations range from bloggers, lawyers, chefs, stylits, caregivers, techies, and many more. If you like the freedom to travel and be your own boss, check out the companies below.
