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I originally posted this a couple of years ago as a reminder and it’s time good advice if you have a bit more time before you file your taxes. Saving up for retirement and getting a tax break is a great deal if you qualify for it.
Deadlines for Contributing to Your IRA
Tax day, April 15, is fast approaching and I know some people are still working on getting their taxes done. The good news is that waiting a bit later to do your taxes gives you some extra time to open and fund your individual retirement account for 2011 tax year, whether it’s a traditional or Roth.
What is the difference between a Roth IRA and a Traditional IRA?
If you’ve never opened an IRA before, you should review some of the pros and cons of a traditional or a Roth account. The main difference between the two IRAs has to do with when you’ll be taxed:
- Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
- Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.
Sources: IRS Publication 590 and Wikipedia
How Should I Direct My Retirement Contributions for 2012?
It’s not too early to work on your 2012 contributions. You may even want to use your tax refund to put a chunk down in your IRA. Some financial gurus, like Dave Ramsey, encourage the following process to maximize your retirement contributions.
- 401(k) up to the employer’s match
- Roth IRA up to the year contribution limit (right now it’s $5,000 if you’re under 50 years old)
- Rest into 401(k)
It’s a great place to start if you’re looking at where to allocate your money.
Photo Credit: sciondriver