10 ways Uncle Sam helps you save money
Saving for the future is of paramount importance to all Americans. Luckily, we all have a rich uncle to turn to for some help. His name is Uncle Sam.
Thanks to the tax code, you have several ways to save that are either tax-free or tax-deferred. Here's a look at 10 popular savings options.
Individual retirement accounts
Known popularly as IRAs, for more than 30 years, these accounts have provided individuals a way to save for retirement and save on taxes. Anyone who works, either for himself or an employer, can set aside a portion of that income in a personal retirement account.
Over the years, the concept has been refined, with tax savings and earnings possibilities enhanced. Generally, individuals with wage income (rather than self-employment earnings) will choose to contribute to either a traditional IRA or a Roth IRA.
1. Traditional IRAs
"Traditional IRA" is the name given to the original account created in 1974. This account is available to anyone younger than 70½ who earns money. The contribution limit for 2007 is $4,000; money can be put into these accounts for last tax year up until the April 15 tax-filing deadline. In 2008, the yearly amount that can be contributed to a traditional IRA increases to $5,000, with an an annual inflation adjustment for subsequent years.
- Advantages: The earnings are tax-deferred, meaning you won't owe the IRS until you make withdrawals, which you can start taking at age 59½. Workers age 50 or older (but younger than 70½) can put in another $1,000 a year. Some individuals also might be able to deduct these contributions.
- Drawbacks: You'll eventually owe taxes on at least some of the money in the account. You cannot contribute once you reach age 70½. When you reach that age, you must start taking out a minimum amount based on an IRS distribution calculation.
2. Roth IRAs
Roth IRA contributions were first accepted in 1998. That year, $8.6 billion went into these retirement plans, with another $39 billion transferred from traditional IRAs to Roths. By 2001, IRS data showed contributions to Roths had passed the amount going into traditional accounts.