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Due to COVID-19 and the unprecedented measures taken to combat the deadly disease, the Internal Revenue Service has delayed the deadline for 2019 federal income tax filings to Wednesday, July 15. Contributions to Individual Retirement Accounts are tied to the deadline, and as such savers and investors have been given three additional months to maximize their 2019 limits. The question is, should they? Let us take a moment to discuss some of the pros and cons of this investment strategy.

One of the biggest advantages of traditional IRAs is that annual contribution totals can be deducted from a tax filer’s total taxable income in a given year. Considering that a maximum of $6,000 is allowed for people under age 50, and $7,000 those 50 or older, annual IRA deductions can lead to relatively significant tax savings. 

What is more, contributing more money allows for a greater long-term “snowball” effect thanks to the main feature, tax-deferred growth on all tax-advantaged retirement accounts. Other pros include bankruptcy protections up to $250,000, the option to have others contribute to the account, and the possibility of multiple concurrent retirements accounts.

Traditional IRAs, however, have their downsides. Just because they allow for short-term tax deductions and long-term tax-deferred growth does not mean that an account holder can avoid the IRS altogether. Conventional IRAs offer a trade-off: upfront annual tax savings in exchange for larger back-end tax payments, or when the funds are withdrawn.

The IRS also levies a hefty penalty for withdrawals prior to age 59.5, and mandates required minimum distributions (RMD) after age 72. If you are nervous about paying large tax bills in your later years, you may want to consider alternative arrangements, like a Roth IRA or other retirement investment. Any potential contributions, however, should be weighed against immediate needs and seeking expert advice would be a great way to arrive at a healthy decision.

Ultimately, tax and investment decisions should be made according to each person’s goals and circumstances. In addition, understanding the basics of traditional IRAs can help each person reach an informed decision. 

Even if you have already filed your 2019 taxes, there is still time to make additional contributions applicable to 2019. Take a moment, however, to consider the pros and cons. If you or someone you know would like more information or guidance about related legal matters, contact our office to schedule a meeting.