Financial Help: Tax Detectability of Contributions to IRA's

Tax deductibility of Individual Retirement Accounts (IRA's) is one of the primary features of these types of investments. These benefits can not only save a person and/or organization money, but also lead to greater income potential. There are several types of IRA's and the tax benefits of each is unique. For individuals the benefits can mean added financial security in older age and for organizations/employers contributing to IRA's , the tax relief can lower payroll tax i.e. money paid to the Government. A brief description of various types of IRA's and the associated tax benefits are as follows:

•Traditional IRA: Contributions to traditional IRA's are tax deductible so long as the amount put into the account complies with federal tax regulations. This tax deduction lowers overall adjusted gross income allowing one to pay less taxes in a tax year or receive a larger tax return. Tax is applied to the contributions and earnings in this type of account at the time of withdrawal. Example: If monthly paychecks are $4,000/month, Monthly contribution from paycheck is $166.676therefore annual taxable income is reduced by $2000 saving $200 at the 10% income tax level.

•Roth IRA: Contributions are made from taxable income, however the withdrawals made after age 59.5 years of age are not taxed and neither are the earnings generated through the Roth IRA. Example: An individual contributes $4000/year to a Roth IRA, that contribution is not deductible, but over 10 years the 4K per year earns 10% each year. Compounded, the 10% tax free earnings yield ($74,124.67-$44,000)=$30,124.67. The $30K in tax free earnings saves one $4500.00 in taxes.

•Employer IRA: Corporations that don't utilize a pension fund may elect to use an employer IRA. These IRA's are established by an employer therefore are tax deductible for them and reduce taxable income for the employee. The affect is generally the same for the employee as taxable income declines in both instances. The contributions and earnings acquired through this type of IRA are tax deferred i.e. taxable upon withdrawal.