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Tax benefits afforded with IRAs

IRA accounts way to save, relief taxes

Posted on 4/26/13 12:56:00 PM

With social security plans looking like a huge question mark for the future generation of workers, many current employees are pondering ways to invest.

The Employee Benefit Research Institute recently released its annual Retirement Confidence Survey, and the poll shows that only 57 percent of respondents in the American work force are saving for retirement.

While many of those saving are using a plan offered by their company, a pension or 401(k) plan, another option available to workers is an individual retirement account (IRA).

There are two options available for potential IRA account holders, and both offer ways to reduce taxes: a traditional IRA or a Roth IRA.

With a traditional IRA, you reduce your current taxable income by the amount of your contribution, and you won't be taxed on your investment earnings. This allows your IRA to compound savings, and it's only later when you retire and begin taking money out from your IRA that your withdrawal will be considered as taxable income.

A Roth IRA, meanwhile, is the ying to the traditional IRA's yang. With a Roth IRA, you won't get a tax deduction while you save, but you won't have to pay income tax on your contribution when you withdraw.

When looking for tax breaks with these avenues, financial experts believes it's best to diversify, as tax reforms are constantly changing.

Retirement Confidence Survey by the numbers
68: The percent of workers responding to the survey that believe they need to save at least 10 percent of their income to live comfortably after retirement.
24: The percent of workers who have saved at least $100,000.
55: The percent of workers reporting to have a problem with their level of debt.
39: The percent of retirees reporting to have a problem with their level of debt.
50 and 52: The percent of workers and retirees, respectively, that could come up with $2,000 if an unexpected need emerged within the next 30 days.