You may be able to avoid the additional tax if you use the money to pay qualified education expenses; spend up to $10,000 for a first-time home purchase; or become disabled. In the case of a Roth, before withdrawing the interest earned, you must have held the IRA for at least 5 years. You can take out your contributions, or “basis,” at any time.
In choosing the option that’s right for you, consider the pros and cons of paying taxes up front or waiting until retirement. While your contribution to a traditional IRA saves you in taxes now, Uncle Sam ultimately will demand his due — withdrawals from a traditional IRA in retirement are fully taxed, and raise the income figure used to compute the taxability of your Social Security.
Contributions to a Roth, on the other hand, are not deductible now, but by paying taxes on your contribution in the year the money is earned, you will avoid being hit with the tax bill in your golden years. There are no withdrawal requirements for a Roth, and while estate taxes may have to be paid on the value of the Roth upon the death of the holder, beneficiaries will not be subject to income tax on any part.
To ensure that you take advantage of all available tax-free savings, tax credits and deductions for tax year 2013, you should immediately consult with a licensed tax professional, such as an enrolled agent. To locate an EA in your area, visit the “Find an EA” directory at naea.org.
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