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Picking the Right IRA Could Save You $1,000

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This article, written by Simon Moore, CFA, MBA, was contributed by Manilla.com, the leading, free and secure service that lets you manage all of your bills and accounts in one place.

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Anyone who wants to cover the cost of living during her golden years should be thinking about IRAs, or individual retirement accounts, just as much as she's nursing her employer-sponsored 401(k)s. Both types of retirement savings accounts are pretty complicated, and in the face of complexity, people often make bad choices.

That's a shame. With a little clarity, investors can save a thousand dollars in taxes if they just meet a few basic requirements. Those include your age, income and how and when they plan to use the money. Here are two ideas to help you choose the right IRA.

Roth IRAs: A Way to Save for a First Home or Education

Although the "R" in IRA stands for retirement, a so-called Roth IRA can sometimes be used for other goals. That is, you don't necessarily have to wait until you're 59.5 years old to withdraw the money without penalty.

That's because the money in a Roth IRA can be used tax-free just five years after the account is opened, as long as it's put toward a first home (up to $10,000) or certain educational expenses. The money grows in a Roth IRA grows tax free. Of course, you do pay tax on any contributions you make to a Roth IRA, so there aren't the immediate tax advantages of a traditional IRA, but the money is tax free when it's withdrawn if the conditions are met.

If you're already on track for retirement through your 401(k), but have other savings goals, like a house purchase or further education, then a Roth IRA may be good to consider. For example, by making the maximum contribution for four years and earning six percent on your investments, you could easily save yourself $1,000 in taxes on the withdrawals.

One caveat: For the 2013 tax year, if your income exceeds $188,000 if married filing jointly, or $127,000 if you're single or the head of a household, then you likely aren't eligible to contribute to a Roth IRA given income limits.

Traditional IRAs: Grow Your Tax Refund by More Than $1,000

People who earn less than $69,000 as a single tax filer (or $115,000 on a joint filing) may be able to contribute as much as $5,500 to a traditional IRA for the 2013 tax year. That amount increases to $6,500 if you're over 50 -- though contribution eligibility stops at 70.5.

That contribution is tax deductible, so it can lower your taxable income, meaning you get a bigger refund or write a smaller check to the IRS.

You won't get the full amount deducted from your taxes, but if you're in the 25 percent tax bracket, say, you could get $1,375 off taxes by making a $5,500 contribution and meeting all the requirements.

The drawbacks are it should be money you plan on using in retirement, and you will pay tax on the money as income when you withdraw it. So there is a tax benefit here for some folks, but only if you really are in a position to put the money toward retirement savings.

IRAs are complicated, so seek professional advice and consult the IRS documents to make sure you qualify and understand the conditions, many of which can't be covered here. (For example, the Exxon Valdez settlement income, airline payments or Kate Bailey Hutchinson spousal IRAs all deserve their own articles...)

Finally, remember you can't have it both ways when it comes to Roth and traditional IRAs. The total contribution limit to all IRAs is fixed, so any dollars that go into a Roth IRA reduce what you can put into a traditional IRA, and vice versa. Also, you can't contribute more to an IRA than your taxable compensation for the year.

That said, IRAs do offer real tax savings to many Americans. For most tax filers, the deadline for IRA contributions is Tuesday, April 15, so get moving if you haven't already committed to your IRA!

Simon Moore CFA, MBA, is a regular contributor to The Manilla Folder at Manilla.com, the leading, free and secure service that lets you manage and share your bills and accounts in one place online and via mobile apps. He is Chief Investment Officer at the award-winning *investment manager* FutureAdvisor. FutureAdvisor provides an online service to analyse and improve upon your retirement savings choices. It takes only a few minutes. See your free analysis at www.futureadvisor.com.

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