why to open an IRA

There are two types of IRA's and each has a different tax advantage. Traditonal or original individual retirement arrangements have two separate types of advantages. There could be a deduction and a credit of your contribution in the current tax year. And you can use these accounts as emergency funds or to help your financial situation. The newer type of iRA, the Roth IRA, provides tax advantages when the funds are distributed from your account.

Anyone who has not reached 70 1/2 years old and has taxable income may open or contribute to a tradional IRA. People who are less than fifty years old may contribute up to $4000 of their income for the current tax year to their traditional IRA. Those fifty and older may contribute up to $5000. These amounts may be deducted on line 32 of form 1040. This lowers the adjusted gross income and therefore the amount on which taxes will be assessed.

If the taxpayer has an additional pension plan, the amounts they can contribute remain the same but the amounts they are able to deduct on their 1040 may be lessened. The formula includes their filing status and income. This information in included in publication 17 and may be obtained by visiting www.irs.gov.s

Low income individuals and couples may qualify for the Retirement Savings Credit. This can reduce the tax you pay. Eligibility for this credit is based on the adjusted gross income, filing status and eligible contributions. The maximum credit is $1000, $2000 if married filing jointly.

For the purposes of the IRA, the tax year can be extended. Contributions made between January first and April fifteenth can be applied to the current tax year or the current year. You can decide which will be better financially for yourself.

The traditional IRA can also be used as an investment plan or an emergency fund.. You can take distributions to put family members through college, or to buy homes. You may also use these funds to pay unforeseen medical expenses. These are explained in IRS publication 590.