Should I open an IRA or a Roth IRA?
I am 65 years old and trying to reduce my taxes for this year.
If you are trying to reduce taxes for the current year, then an IRA would be the best choice.
Assuming certain qualifications are met, your contributions to a traditional IRA are tax deductible in the current year, the account will accumulate tax-deferred, and the distributions will be taxed as income as you withdraw your funds.
A Roth IRA will not give you a tax break in the current year as it is funded with after-tax contributions, but will accumulate tax free and assuming certain qualifications are met, distributions will be tax free in retirement.
Both are good retirement options. However, I believe that Roth IRA's are better when these issues make sense in your situation (otherwise a Traditional IRA may make be a better option):
- You are eligible to contributute to a Roth IRA (income below thresholds per IRS),
- You are in a lower tax-bracket and the current tax deduction for a traditional IRA is lesss helpful, and
- You want "tax diversification" by having more than one retirement tax bucket.
Also don't forget that you can do a spousal IRA in many cases even if your spouse does not work (but you have enough income). Also, if you are not eligible for a Roth IRA contrictuion, you may benefit from a Roth IRA Conversion. Here are a few pieces from my webiste that may be helpful:
Although I am not a tax professional, if you are looking to reduce your taxable income then contributing money to a traditional IRA would be the choice to consider as contributions can be deducted. I would encourage you to speak with a tax professional to make sure this is the best option for your particular income and tax situation.
Assuming you have the earned income, a traditional IRA will allow you to make tax-deductible contributions up to $6,500 (since you are over age 50), but I would review my overall tax bracket and determine if it makes sense. For example, if you contribute the maximum amount of $6,500 in 2016 to a traditional IRA, but are in a 15% tax bracket, that contribution would effectively only reduce your overall taxation by $975. However, the entire amount will be subject to Required Minimum Distributions (RMDs) by age 70 ½, possible Social Security taxation, and fully taxable.
On the other hand, the Roth IRA isn't tax-deductible but also not subject to RMDs, Social Security taxation, and is tax-free when withdrawn (after 5 years).
If you have any further questions, I'd be happy to help.
This is an excellent question and the answer may prompt additional questions.
An IRA would be the only option to potentially reduce your taxes for the year. Keep in mind, you will still need to satisfy certain requirements in order to make a deductible IRA contribution. The monies, when removed from your IRA, will be taxed as ordinary income at that time. You will need to start taking withdrawals or Required Minimum Distributions at age 70 1/2.
Although the Roth IRA will not reduce your tax liability now, the assets will grow tax free. Keep in mind that you need to satisfy certain requirements in order to be able to make a Roth contribution. Not only will the assets grow tax free, meaning if you take withdrawals in the future you will not pay taxes like you will on the IRA, but you will not have the requirement to begin Required Minimum Distributions at age 70 1/2.
I highly suggest you review the options with your advisory team, especially your CPA and fiduciary advisor to discern what the best long term option is for you.