Diversified tax benefits today and tomorrow


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Key Points

  • A diversified tax strategy can help your assets last longer and optimize savings toward financial goals.
  • Individual retirement accounts offer a tax benefit today or when you retire, depending on the type.
  • Following is a summary of traditional and Roth IRAs to consider with your advisor and tax professional.

You spend years accumulating retirement savings, much of it in tax-deferred accounts such as a 401(k) or a 403(b). Individual retirement accounts (IRAs) offer potential benefits today or when you retire by helping you diversify how your investments may be taxed. Traditional and Roth are common IRA types.

Here are some things to consider:

  • There is no age limit to make contributions to traditional and Roth IRAs, but you must use earned income.
  • For the 2020 tax year, total contributions to all traditional IRAs and Roth IRAs cannot exceed $6,000, or $7,000 if you are age 50 and higher.

 

Traditional IRAs

Consider funding a traditional IRA if you want to lower your taxable income today, if you believe you will be in a lower tax bracket in retirement or if your income is too high for a Roth IRA.

Traditional IRA contributions may be fully or partially deductible, per IRS rules. When you withdraw money, it is treated as taxable income according to your tax bracket at that time.

Here’s what else to know:

  • There are no income limits for contributing to a traditional IRA or converting those funds to a Roth IRA in the future.
  • Your tax deduction may be limited if you (or your spouse) have a retirement plan at work and your income exceeds certain levels. Visit irs.gov or a tax professional for details.
  • You cannot keep funds in your account indefinitely. A certain amount — a required minimum distribution, or RMD — must be withdrawn each year beginning at age 72.  

 

Roth IRAs

If you envision being in your current or a higher tax bracket when you retire, a Roth IRA could be an option for you. Roth IRA contributions are not deductible for a given tax year, but qualified withdrawals are tax-free.

Additionally:

  • Roth eligibility is limited by your modified adjusted gross income: less than $124,000 single or $196,000 joint.
  • Roth IRAs are not tax deductible and are not subject to RMDs.
  • You can withdraw Roth contributions anytime, but not the earnings.

 

Manage taxes throughout your life stages

Your retirement could last several decades. Addressing taxes now gives you more control and could help your assets last longer. Your Ameriprise advisor and tax professional can help you determine your personal benefits of a traditional or Roth IRA based on your goals and investments.