Spoonful of Sugar

The IRS recently announced updates to its website intended to make it easier for tax payers to navigate.  The agency has also implemented a YouTube channel with tax payer assistance “how to” videos.  2011 saw the introduction of IRS ToGo, a free smart phone app that allows tax payers to file taxes by phone.  The IRS is doing its best to make filing and paying taxes fun and easy.  What this amounts to for most tax payers is a spoonful of sugar to help the bitter medicine of paying taxes go down. 

It’s nice to know that the IRS is using digital media to smooth the tax filing process.  But what almost everyone would like to know is “How do I pay lower taxes?”  To start at the beginning, consult a good tax adviser to see if there are any deductions you may have missed.  If you’ve taken every deduction that applies and your tax paper work is in order, the next step is to consider another way to reduce your tax liability.

You may be eligible to take advantage of the tax savings feature of a tax deductible Individual Retirement Account.  Individually you can contribute up to $5,000 if you are less than 50 years old, or up to $6,000 if you are over 50 years old.  That amount can be divided between a traditional or ROTH IRA. 

The ROTH IRA doesn’t offer the immediate tax advantages of a traditional IRA.  Contributions to a traditional IRA are made pre-tax, reducing the share of your income that is considered taxable.  Contributions to a Roth IRA are made post-tax.  The tax advantage of the Roth is realized on withdrawal of funds.  With a traditional IRA, the entire withdrawal is taxed.  If traditional IRA funds are withdrawn before age 59 ½ tax penalties are likely to apply, depending on the reason for the withdrawal.  In the case of the Roth IRA, only the gains earned on the contributions are taxable.  Tax penalties may apply before age 59 ½ to withdrawal of gains. 

To learn which type of IRA makes the most sense of you, it’s important to consult a knowledgeable financial adviser.  Most tax payers would agree that paying lower taxes is a better spoonful of sugar.  Because of tax consequences and the value of long range financial planning, its best to think of your IRA funds as locked away for the “golden years”.  Setting up an IRA with automatic contributions is easy.  Automatic deposits to an IRA can be debited from a bank account or a pay check.  Unseen money is so much easier to save.  If you don’t see it, you don’t miss it.

If the possibility of reducing your tax bill through a tax deductible IRA plan sounds appealing, contact a financial advisor you trust for more information.  They’ll help you choose the right plan for you.  A tax deductible IRA may not be suitable for all situations.