IRA Contributions For Maximum Tax Benefits

When planning for retirement there are a lot of options to consider. One really great retirement vehicle is the IRA. The advantage of an IRA is that it is not dependent on where you are employed like a 401(k) or other company sponsored accounts, and in today's volatile job market many people are rolling their company sponsored retirement accounts into IRAs for easier portability when moving from job to job.

The time to start making IRA contributions is as soon as you start your first job. The earlier you start building your IRA the more you will end up with at retirement. Simply put, the longer an account has to draw interest and profit makes the difference in end results. The person who makes the maximum IRA contributions from ages 20 to 40 will retire with significantly more money than the person who makes the same IRA contributions from ages 30 to 50.

The maximum IRA contributions you can make, as of 2008, is $5000 per year. If you have multiple IRA accounts, this limit would include all of those IRAs together, not individually.

There are two different types of IRAs for you to choose from. The main difference between these two structures is how and when the money is taxed. Your tax situation will determine which option is right for you.

The two types of IRAs are a Traditional IRA and a Roth IRA. When you make IRA contributions to a Traditional IRA, the amount is deducted from your taxable income giving you a tax savings in the contribution year. When you take withdrawals from your IRA after retirement, this amount is taxed as income and so is likely to be calculated at a lower income bracket than when you originally earned the money. For the Roth, IRA contributions are taxed normally so there is no tax savings at the time they are invested into the IRA. However, when you begin to draw from the account after retirement, then there is no income tax collected. This way you not only avoid taxes at a time in your life when they might be more cumbersome, but also avoid paying taxes on capital gains, dividends and interest on the investments within the Roth IRA account.

If you are making a high income and are looking for additional tax savings, you can still make the maximum IRA contributions to a Traditional IRA even if you've all ready put money into a 401(k) or other non-IRA retirement account. If you are more concerned with maximizing your income at retirement with the smallest tax burden then, the Roth is the way to go. You are also free to make IRA contributions to different accounts, making IRA contributions to a Traditional account in some years and a Roth IRA in other years, making that decision on a yearly basis, or even doing both within the same year, though again, the amount of money you can contribute to all of your IRAs added together in a single year remains the same.

For more information on IRA contributions please visit http://www.iracontributionexpert.com.