The Basics of IRA Tax Benefits

IRAs are one of several ways you finance your retirement. You may have a pension plan and/or Social Security benefits along with personal savings, but IRA tax benefits play a critical role in your savings strategy to retire in style.

It is well known that the savings you sock away in your plan are meant to benefit you in retirement and not before. But there are some advantages you can enjoy now depending on the type of plan you have. These IRA tax benefits come in the form of  deductions for contributions and/or tax-deferred or tax-free earning potential on the returns of the investments in your plan.

Tax Deductions for Contributions

Traditional, SEP and SIMPLE IRAs offer certain tax deductions on your annual contributions. For the individual, traditional IRAs allow an automatic tax deduction as long as you do not contribute to or receive a contribution in an employer-sponsored plan. If you do contribute to an employer plan, your deduction, if any, is based on your adjusted gross income. These deductions can reduce your taxable income at year’s end and provide a bit of relief on your tax liability.

Business owners who use SEP and SIMPLE IRAs can contribute to their employee plans, thereby reducing the business tax liability each year. In these cases, self-employed individuals are considered both an employer and an employee. Contributions to employee plans are salary deferrals—and are therefore not taxed until withdrawn in retirement.

Tax-Deferred Earnings

Yes, it’s common knowledge that earnings on investments enjoy a tax-sheltered status. But, there is a difference between tax-free and tax-deferred. Most IRAs provide tax-deferred benefits to the income you build in your account. This means you aren’t taxed until you take a distribution in retirement. The rate applied will be the standard rate of income tax in the year you take a distribution on those earnings.

Tax-Free Earnings

If you have a Roth IRA, you can’t take a deduction on your contributions. But, you enjoy the potential ability to grow tax-deferred income on your investments. And if you qualify, you might get the advantage of tax-free growth on your earnings in the account. In order to take this qualified, tax-free withdrawal you must have owned the account for a minimum of five years and meet one of the following criteria:

  • Have a permanent disability
  • Reached the age of 59 ½
  • Purchasing or building a first-time home (up to $10,000)
  • The distribution is to a beneficiary upon your death

IRA Tax Benefits for Self-Directed Plans

The above IRA tax benefits also apply to self-directed retirement plans. Self-directed plans are governed by the same rules and receive the same tax considerations as conventional IRAs. The only difference is that these accounts are administered by custodians who allow you to invest in alternative assets to build your retirement wealth. Alternative assets aren’t bound by Wall Street norms and consist of holdings such as commercial and residential real estate, private equity, private lending options, Bitcoin, forex trading…and much more.

To discover how you can take control of your own destiny by investing in things you know and understand using a self-directed IRA, contact Advanta IRA today at 800.425.0653.