How to Reduce Your Federal Tax With a Roth IRA

A Roth individual retirement account provides a way to save for your future while providing significant tax benefits. Although a traditional IRA account offers immediate tax savings if your contributions qualify as deductions, a Roth IRA offers no immediate tax savings. However, withdrawals from your Roth account at retirement age are tax-free, and this can significantly reduce your federal taxes then. The impact on your future federal tax liability will depend on our tax brackets now and then, how large the account grows, and how much money you withdraw from the account.

Retirement Planning Tool

Step 1

Determine whether you qualify to make Roth IRA contributions. As of 2013, if you are single and earn less than $112,000 in modified adjusted gross income per year, you can make a full yearly Roth contribution. From that point, your eligibility phases out up to $127,000 per year. At modified adjusted gross incomes higher than that, you cannot contribute to a Roth. If you are married filing a joint return, the qualifying modified adjusted gross income is $178,000 to make contributions, with the allowable amount phasing out until you are at $188,000 per year. You must have earned income to contribute to a Roth, such as from a salary or from self-employment. The qualifying amounts are generally adjusted each year to account for inflation.

Step 2

Open a Roth IRA as soon as you can. If you do not have enough money to make the required initial deposit with a mutual fund company or brokerage, open the account at a bank. Most banks allow you to start an IRA with a savings account, with a very low minimum deposit

Step 3

Deposit money regularly into your Roth IRA account. As of 2012, you could contribute up to $5,000 per year if you were younger than 50, or $6,000 per year if you were 50 or older, as long as you qualified for the full contribution. The amount increases in 2013 by $500. Consistent savings, starting as young as possible, will ensure maximum growth of your money.

Step 4

Withdraw money from your Roth at retirement as a qualified distribution. All qualified Roth disbursements are tax-free. If you are age 59 1/2 or older and you have had the Roth account for at least five years, all of the money you withdraw is tax-free, including the investment gains. Even if you aren't yet 59 1/2, you can withdraw up to $10,000 from a Roth IRA without penalty to purchase your first home, or to pay tuition expenses for your education or a family member's education.


  • If your expect your tax bracket to be lower in retirement, you might wish to fund a traditional IRA instead. You can claim an immediate tax deduction for a traditional IRA contribution, reducing your taxes in the current year, and then pay taxes at the lower rate when you withdraw the money at retirement.

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