Being smart with your investments could help you save and earn more money over the years, and finding tax-free investments is a great strategy to consider. One tax-free investment you could look into is a traditional IRA. These are not completely tax-free; however, they offer significant benefits that are worth looking into.
How Do They Work?
An IRA is an individual retirement account, and a traditional IRA is one of several types of IRAs available. When you set up a traditional IRA, you will be allowed to contribute up to $5,500 per year tax-free. Tax-free means that you get to write off your contributions from your tax return, which will cause your income to be lower than it actually is. The benefit of this is that you will pay lower taxes each year you contribute money to the fund.
If you are married and your spouse also works, you could both open up a traditional IRA and make the maximum contributions each year. This would reduce your income even more, and it would help you prepare for retirement. One thing you should know is that once you reach the age of 50, you are eligible to contribute even more money to your IRA. As of 2015, the maximum amount for a person over 50 was $6,500 per year.
Are They Really Tax-Free?
There are very few investment types that are completely tax-free, including traditional IRAs. They are considered tax-free investments because you do not pay taxes on them when you make the contributions; however, you will pay taxes on them later on in life.
Because your contributions to a traditional IRA come from pre-tax money, you are required to pay taxes on the withdrawals you make. You will get taxed not only on the gains the account makes over the years, but you will also pay taxes on the contributions you have made. The tax rate used for calculating the taxes will be whatever bracket you fall into at the time you withdraw the money.
If you wait until you are 70 1/2 years old to take your deposits, you might already be retired. Because of this, your income bracket will be low, which means you will pay lower taxes on the withdrawals made from the account.
There are many types of investment options to choose from, but a traditional IRA might be the best for you. To learn more about tax free investing, contact a financial advisor and schedule an appointment to discuss your options.