The Individual Retirement Account (IRA) is a useful vehicle for retirement savings beyond having income or an accumulated reserve for retirement. It rewards contributors in the present as well – by allowing their contributions to be deductible up to a certain limit. For the year 2011, the IRS.gov website stipulated limits for contributions to the retirement accounts as follows:
• “If you are under 50 years of age at the end of 2011: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2011. This limit can be split between a traditional IRA and a Roth IRA but the combined limit is $5,000.”
• “If you are 50 years of age or older before the end of 2011: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2011. This limit can be split between a traditional IRA and a Roth IRA but the combined limit is $6,000.”
The benefits of using these maximum contributions depend on whether you are using a traditional IRA as opposed to a Roth IRA. However, the contribution levels are determined by the combined amounts – even if you are using both types of IRAs. Generally, with traditional IRAs, you get tax benefits now; however, you are taxed on withdrawals even after maturity. Roth IRAs offer no tax deductions now, but offer tax exemptions on withdrawals after maturity. The benefits of 2011 maximum IRA contributions can be summed up in terms of tax benefits.
• Lower taxable income
This benefit relates to the traditional IRA only. Using the maximum benefit merely reduces the income available for tax levy. If you use both IRAs, you can only claim for the portion contributed to the traditional IRA; the Roth IRA serves to limit your contribution and the deductible benefit.
• Tax exemptions with Roth IRA
Contributions to the Roth IRA create a pool of tax-exempt retirement income later on. It uses money that is already taxed, but this helps to reduce the tax risk that is inimical to fixed retirement incomes.
• Best of both retirement vehicles
Maximizing contributions allows individuals to utilize the advantages offered by both types of IRAs. Instead of contributing less than the stipulated amount in a given year, maximum contributions facilitate a healthy split between the traditional and Roth IRA.
The type of benefits of maximizing contributions depends on the type of retirement account chosen. Ideally, you should have a combination of the two to ensure flexibility of your retirement plan and dual tax benefits (exemptions now and in future). Only by maximizing contributions can an individual truly get the best of both retirement accounts.