The Basics of IRA Tax Benefits

IRAs are one of several ways you finance your retirement. You may have a pension plan and/or Social Security benefits along with personal savings, but IRA tax benefits play a critical role in your savings strategy to retire in style. The information below applies to typical and self-directed retirement plans.

Imabe with coins and the word "tax" superimposed on city lights of buildings to illustrate the potential of IRA tax benefits.

Depending on the type of retirement plan you have, you can enjoy the following tax benefits now and again later when you retire. Some plans offer deductions for contributions. Additionally, different accounts offer either tax-deferred or tax-free earnings of investments in your plan. Read on to learn which IRA tax benefits apply to your current plan. These points are helpful when deciding which retirement plan is the best fit for your goals, as well.

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1. Tax deductions for IRA contributions

Traditional, SEP and SIMPLE IRAs, and solo 401(k)s offer certain tax deductions on contributions for individuals and small business owners.

Traditional IRAs for individuals:

Traditional IRAs for individuals allow an automatic tax deduction as long as you do not contribute to or receive a contribution in an employer-sponsored plan. If you do contribute to an employer plan, your deduction, if any, is based on your adjusted gross income. These deductions can reduce your taxable income at year’s end and provide a bit of relief on your tax liability.

SEP and SIMPLE IRAs and solo 401(k)s for small businesses:

Retirement plans for small business owners (SEP and SIMPLE IRAs, and solo 401(k)s) can contribute to their employee plans, thereby reducing the business tax liability each year. In these cases, self-employed individuals are considered both an employer and an employee.

Contributions to employee plans are salary deferrals—and are therefore not taxed until withdrawn in retirement. Different rules apply to each plan, so consult your tax advisor for guidance.

2. Tax-deferred earnings for traditional, SEP, and SIMPLE IRAs, and solo 401(k)s

Yes, it’s common knowledge that earnings on investments enjoy a tax-sheltered status. But there is a difference between tax free and tax deferred.

Most IRAs and 401(k)s provide tax-deferred benefits to the income you build in your account. This means you aren’t taxed until you take a distribution in retirement. The rate applied will be the standard rate of income tax in the year you take a distribution on those earnings.

3. Tax-free earnings for Roth IRA owners

If you have a Roth IRA, you can’t take a deduction on your contributions. But you enjoy the potential ability to grow tax-deferred income on your investments. And if you qualify, you might get the advantage of tax-free growth on your earnings in the account. To take this qualified, tax-free withdrawal you must have owned the account for a minimum of five years and meet one of the following criteria:

  • Have a permanent disability
  • Reached the age of 59 ½
  • Purchasing or building a first-time home (up to $10,000)
  • The distribution is to a beneficiary upon your death

Benefits for Self-Directed Plans

The above tax benefits of an IRA also apply to self-directed retirement plans. Self-directed plans are governed by the same rules and receive the same tax considerations as conventional IRAs. The only difference is that these accounts are administered by a provider who allow you to invest in alternative assets to build your retirement wealth. Alternative assets aren’t bound by Wall Street norms and consist of holdings such as commercial and residential real estate, private equity, private lending options, Bitcoin, forex trading…and much more.

To discover how you can take control of your own destiny by investing in things you know and understand using a self-directed IRA, contact Advanta IRA today.

Additional Reading:

Roth IRAs vs. Traditional IRAs: A Comparison of the Benefits and the Differences

How Do Roth IRA Conversions Benefit You in Retirement?

This article was initially published on May 7, 2019 and has been updated with current information.

To discover how you can take control of your own destiny by investing in things you know and understand using a self-directed IRA, contact Advanta IRA today at 800.425.0653.

About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.