How YOU Can Get a $6000 TAX DEDUCTION - IRA Explained

Hey business warriors, welcome to the show, and seeing the title you probably clicked in because you want to pay less in taxes, well you have come to the right place, we are all about reducing your tax bill, legally of course. And if you like that kind of thing please subscribe to the channel and hit notifications bell.

So what I am talking about in this video is the traditional IRA, or Individual Retirement Account. There is another type of IRA, the Roth IRA but we will save that for another video. So what the traditional IRA is, is an investment account where you can buy stocks and bonds, and you are not taxed on the money you put into it, at least not now, you will have to pay tax on it in the future, we will get to that part.

So currently you can put $6000 into the account per year, and if you are over 50 years old $7000, they give you $1000 extra to help you catch up with the people who have been putting money in for decades. And it is tax deferred, so you don’t need to pay tax now on that $6000 it is a tax deduction on your 2020 tax return. Don’t confuse a tax deduction with a tax credit, a $6000 tax credit would mean you pay $6000 less in taxes, a $6000 tax deduction means you don’t have to pay tax on that $6000, so if your tax rate was 25% for example, you would pay $1500 less in taxes.

Now we mentioned it is tax deferred, this means that when the IRA gets to the withdrawal age which is at the earliest 59 and a half and at the latest 72, when you are forced to withdraw if you haven’t already, you have to withdraw the funds and pay tax on the money at whatever tax rate you find yourself in. This will be advantageous to many, who will be in a lower tax rate in retirement than they would be when they were working. Or you might just want to put off paying tax, and that is a great motivation to save some money for retirement.

Now if you want to take the money out before age 59 and a half, you incur a 10% penalty and get taxed on the money at whatever tax rate you are at. But there are a load of reasons you can pull money out without a penalty. These range from buying your first home, medical expanses, military members called to active duty etc… I’ll put them all on screen, you can pause the video to read them for yourself.

You plan to use the distribution towards the purchase or rebuilding of a first home for yourself or a qualified family member (limited to $10,000 per lifetime).
You become disabled before the distribution occurs.
Your beneficiary receives the assets after your death.
You use the assets for unreimbursed medical expenses.
Your distribution is part of a SEPP program.
You use the assets for higher-education expenses, or expenses incurred for having or adopting a child.
You use the assets to pay for medical insurance after you lose your job.
The assets are distributed as a result of an IRS levy.
The amount distributed is a return on non-deductible contributions.
You are in the military and called to active duty for more than 179 days.

Now you might think, we are already in 2021, I have missed the boat for my 2020 tax return, but actually that is not the case, you can contribute for the previous year any time up to the tax filing deadline, which is normally April 15th. But this year the IRS has moved the deadline back to May 17th, so the IRA contribution deadline, along with a few other things has also moved back to May 17th. If I log in to my Schwab account and do a transfer to my IRA, you can see it gives me the option of 2020, 2021 or 2022 contributions and it will track how much you have put in for each year.

I hope that explains that traditional IRA clearly enough for you, if you haven’t heard of it before, but have some money and want to reduce you taxes, you do actually have time to set up an IRA now and benefit for the 2020 tax year. I have mine with Charles Schwab, but also the other brokerage app I use Webull also offers IRA’s and if you sign up for Webull you can get 2 free stocks valued up to $1600 for opening and funding your account.

We did also mention in this video the Roth IRA, basically the Roth IRA is the other way around, you pay tax now but you wont in the future. This is better for people who think they will pay tax at a higher rate in retirement than they do now or want to pass it on to their heirs. We will do another video on that, so hit the like button, if we can get 500 likes on this video, I will make sure I do a Roth IRA video very soon.

Alright please subscribe if you are new, get your two free stocks from Webull and we will see you next time, bye.

[rcwilson]

Here is a question about traditional IRA contributions and entering the amount of the contribution as a deduction on 1040 line 10. What happens if your taxable income after taking the standard deduction is already zero without the IRA deduction? It seems that the standard deduction would cancel out your IRA deduction, so you would end up paying taxes on your IRA contribution 2X. Is that correct?

[ChristianAviles]

If I want to convert this do I need to open another IRA account correct? I just have a Roth IRA at the moment..

[anthonygardner]

Can you deduct the $6000 regardless of your income?

[victormtz]

The dislike became a not for me 😅weird observation don’t mind me.