Traditional IRA or ROTH IRA?
When you stop working with a United States employer, move abroad, and work with a foreign employer, you can no longer access your US-based 401k retirement plans. What are your other options? IRAs tend to fit the bill – IRAs are individual retirement accounts, where you can contribute a certain amount of money every single year depending on your income level. There are two types of IRAs: traditional and Roth.
A traditional IRA allows you to contribute a certain amount every year. Some IRA contributions are tax deductible. This means you’re saving some taxes now and deferring them until a later point. It’s important to remember if your employer has a pension plan in place, then you may or may not be eligible for a deduction, but you can still contribute to your traditional IRA and save for retirement.
The other IRA option is a Roth IRA. You can contribute to this, these are not tax deductible but you do not pay taxes on the funds now or at a later date. In other words, you cannot take any tax benefit now, but it’s good at a later time. You can contribute every year and save money. It is important to think about your income level. A Roth IRA has a very strict income limit, where you can contribute or not. The good part about both IRAs is the contribution date is April 15th of the following year, so it gives you a very good planning opportunity. You can estimate your income for the whole year, depending on the total income and decide whether to contribute your Roth IRA take the maximum benefit out of it.
What’s the Most Important Difference Between the Traditional IRA or the ROTH IRA?
Traditional IRAs are tax deductible now and not deductible later. Traditional IRAs are taxed on any additional income which you earn, wherein Roth IRAs are tax free, so you don’t pay any taxes on contribution or also the earnings. When you take the money out, there is no deduction.
One of the clients we advised if their income is more than $200,000 per year, they cannot contribute to a Roth IRA. The alternative is to advise them to contribute to a Traditional IRA wherein they can take a deduction now and then contribute as well. Again, if there is any income derived from those contributions, they have to pay taxes at a later point.
We also have a client who is a teacher and earns around $80,000. In this case, contributing Roth IRA is better. We advised them to contribute a Roth IRA instead of a Traditional IRA. It offers a better opportunity for them to avoid taxes until a later date. Essentially, they’re not paying any taxes until they reach retirement age on the contribution and also on any income which they generate from the contributions.
We have a lawyer who is working in the Emirates and he has a sizable amount of income, making more than $250,000 per year. Contributing to a Traditional IRA would be an ideal option, however there is an age limit to contribute to a Traditional IRA. Once you reach a certain age, you can no longer contribute. It is important to be aware of age and other facts so you can give each client the best advice.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
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