That is a personal decision, depending mostly on how much you need the tax write-off now.  But consider a person in the 25% tax bracket who starts an IRA at age 40 and contributes $3,000 a year until age 70.  Assuming an average 8% annual return, the IRA will grow to over $300,000.  Over the years, you will pay about $23,000 in taxes on the income you put in the Roth.  If you choose a traditional IRA, you can expect to pay about $89,000 in taxes on your withdrawals at retirement.

I have created a Microsoft Excel spreadsheet that allows me to put in the specific facts for you such as tax bracket, annual contributions, years remaining to retirement, and estimated annual rate of return.  This spreadsheet will then calculate the expected taxes under both a Roth and a traditional IRA.  Please call or e-mail us if you would like to schedule a time to discuss your options with us personally.

How can I qualify for the Savers Credit?

The Savers Credit encourages you to contribute to a traditional or a Roth IRA. You can also contribute to your employer’s qualified retirement plan. Your income must be below $25,000 for single taxpayers. Heads of household can earn $37,500.  The income limit is $50,000 for married taxpayers filing jointly.  You also must be 18 or older, not a student, and not claimed as a dependent on someone else’s tax return.  The credit starts at 10% of your retirement plan contribution.  It can reach 50%.  This means the Savers Credit could increase your tax refund as much as $1,000 per person!

I didn’t make my retirement plan contribution before year-end.  Is there anything I can do about this?

You can contribute to a traditional or Roth IRA for a tax year until the April 15 filing deadline the following year.  Self-employed individuals can also contribute to a SEP or SIMPLE IRA until April 15.  This included the Savers Credit.  Unfortunately, any contribution you make to your employer’s 401(k) or similar plan only helps you in the year you make the contribution (the extra time to April 15 does not apply for these plans).

Important Note!