IRAs – to contribute ore not to contribute?

IRAs, Denver financial planning

April 15th is just around the corner and one of the questions your CPA may pose to you is, “Will you make an IRA contribution for 2017 before the deadline?”  And you are thinking, “Should I or not?”


Individual Retirement Accounts (IRAs) come in a couple of flavors:  Traditional or Roth.

Traditional IRA

A Traditional IRA allows you to take a tax deduction for up to $5,500 ($6,500 if you are aged 50 or over) for putting that money in an account for your retirement.  The money needs to be left there until your age 59 ½ or you risk paying an IRS penalty of 10% for early withdrawal.  The growth is tax-deferred, meaning you will not pay taxes each year on dividends and capital gains generated in the account.  When you take the money out at retirement, the withdrawals are taxed at your ordinary income tax rate.


Who wouldn’t want that?  Turns out, you may not be able to take that lovely up-front tax deduction.  If you are eligible for a work retirement plan (even if you choose not to participate – FOOL!), you cannot deduct an IRA contribution if you make over a certain income.  Being subject to IRS rules, those limitations are tiered and complicated to write out, so click here for a handy table from your friends at the IRS.

Roth IRA

The other option you could use is a Roth IRA.  Roth IRAs do away with the up-front deductibility of the Traditional IRA.  In other words, the $5,500 (or $6,500 for you old folks) that you put in a Roth IRA would be the same as putting the money in a savings account from a tax standpoint.


The benefit – and it’s a big one – is that the money then grows tax-FREE so when you take it out after age 59 ½, you pay no income taxes on the withdrawal.


No matter what the tax benefit, you I’m guessing you should be saving more for retirement.  This is especially true if your accountant is telling you that you owe a tax bill.  If you are a small business owner, explore the plans available to you in addition to the accounts described above.


Happy tax season!

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