How a Roth IRA Can Help You Reduce Future Taxes

A Roth IRA is a retirement account you fund with money you have already paid taxes on. Unlike a traditional IRA, you don’t get a deduction when you contribute, but once the account meets the IRS rules, qualified withdrawals — including earnings — can be completely tax-free.

The difference between the two comes down to when you pay taxes:

• Traditional IRA: You may get a tax break now, but withdrawals in retirement are taxed as income.

• Roth IRA: You pay taxes now, but future qualified withdrawals are tax-free later.

To make a Roth IRA contribution, you must have earned income — wages, salary, or business profit after expenses. If your business has a net loss for the year, you don’t have earned income for contribution purposes.

If you are unsure whether a Roth or a Traditional IRA fits your situation, it is a good idea to talk with a financial advisor and a tax professional. You can have both types of IRAs, but your total contributions across all IRAs for the year can’t exceed the annual IRS limit.

Each week, I share a clear, bite-sized tax insight straight from my continuing education so you can stay informed without sifting through tax changes.

Next week, we share the limitations on withdrawing from a Roth IRA.

Thanks for reading,

Brandy Sparkman, EA

I’ll keep learning so you can stay focused on what you do best.

See you next week for another Tax Minute.