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Worried about how you’ll fare in the annual tug of war with Uncle Sam? Good news: There’s still time to reduce this year’s tax bite by opening an individual retirement account (IRA). IRAs are basically tax-advantaged ways for you to save for retirement. You can contribute income up to the annual limit—$5,500 for 2015, or $6,500 if you’re age 50 or older—in an IRA any time before April 18, 2016.

There are two primary types of IRAs: traditional and Roth. The main difference between the two has to do with when and how you’re taxed on the funds they contain. With a traditional IRA, you contribute pre-tax dollars—meaning you can deduct that contribution amount on your tax return. Those savings grow tax-free until you make withdrawals in retirement. With a Roth IRA, on the other hand, you’ll contribute after-tax dollars—foregoing saving on this year’s tax bill—but pay no tax on your withdrawals in retirement as long as you have held the account for at least five years.
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In deciding between the two options, there are also eligibility and flexibility differences to consider.

Traditional IRA

  • Anyone with taxable income can contribute—there is no income limit for eligibility.
  • If you also have a workplace plan, you can take the full deduction for IRA contributions only if you have an adjusted gross income of less than $61,000. (If you are married and your spouse has a retirement plan at work, your joint income will need to be under $183,000 to qualify for the full tax-deferred contribution.)
  • After age 70 ½, you can no longer make contributions.
  • You must begin taking required minimum distributions after you reach age 70 ½.

Tip
Still not sure which option is right for you? Your Allstate Personal Finance Representative can provide more detailed information on IRAs and help you decide.

Roth IRA

  • To qualify to make a full Roth contribution for the 2015 tax year, your modified adjusted gross income must be no more than $116,000 (or $183,000 for married couples).
  • You can withdraw your principal tax-free at any time.
  • There are no mandatory withdrawals during your lifetime, so your account can continue to build tax-free well into your retirement years or even be passed down to your heirs.

With tax season approaching, now is a good time to consider your IRA options. Whether you choose a traditional or a Roth IRA, you’ll trim your tax bill today or set yourself up to pay fewer taxes in retirement.