An IRA (Individual Retirement Account), not to be confused with 401(k)s, which are provided by employers, is essentially a savings account with big tax breaks, according to CNN Money. An IRA itself is not an investment rather, it is the basket that holds stocks, bonds, mutual funds, and other assets.
There are several types of IRAs, including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. With traditional IRAs, which we will discuss here, you pay taxes when you withdraw money in retirement.
Those older than 50 have higher contribution limits for traditional IRAs. According to Publication 554, two distinct advantages of traditional IRAs are:
- You may be able to deduct some or all of your contributions to it, depending on your circumstances
- Generally, amounts in your IRA, including earnings and gains, are not taxed until distributed
Once you reach 70 ½ years old, you must begin withdrawing and paying ordinary tax income on funds from your IRA. However, according to Forbes, Congress enacted a special IRA charitable rollover tax deal during its fiscal cliff negotiations in early January that allows those 70 ½ and older to transfer as much as $100,000 a year from their traditional IRAs to charity. Thats particularly an advantage when filling out the Ohio return, says AARP Tax Aide Joe Palmieri.
Here's how it works: Instead of withdrawing (and paying taxes on) the money from your IRA, you can tell the custodian of the account to send your withdrawal directly to a charitable organization. Charitable organizations, unlike beneficiaries, do not need to pay income tax on withdrawals from traditional IRAs. Note: IRA funds donated in this fashion cannot be used for contributions to donor-advised funds, supporting organizations or private non-operating foundations.
Check out these two other important tips about traditional IRAs for 2013:
- Although interest earned from your traditional IRA generally is not taxed in the year earned, it is not tax-exempt interest. Do not report this interest on your tax return as tax-exempt interest
- The most that can be contributed to your traditional IRA has increased from $5,500 to $6,500 for those 65+
Want to learn more about the potential benefits for taxpayers 65+? Download our FREE guide Tax Relief for Older Adults: A Basic Guide to Benefits before you file this year!