In an era where pensions are few and far between and future Social Security benefits are in question, it’s important for individuals and their families to save for their own retirement. A great and simple way to save for your retirement (with potential tax savings) is through an Individual Retirement Account (IRA). IRA contributions for tax year 2016 are due by April 18, 2017 (this year’s “tax day” as opposed to April 15).
TRADITIONAL vs ROTH IRA
For eligible taxpayers, the traditional IRA offers a current tax savings opportunity in the form of a tax deduction for the amount of your contribution. Future withdrawals of traditional IRA principal and earnings are taxed at ordinary income tax rates. Roth IRA contributions are not deductible, but qualified withdrawals are tax free. Roth IRAs offer the advantage of tax-free growth.
RULES, ELIGIBILITY, AND LIMITATIONS
Traditional and Roth IRAs have the following rules and limitations:
- Maximum annual contribution is $5,500 per individual; $6,500 if age 50 or older for the contribution year. (this maximum is for traditional and Roth combined)
- Taxpayers age 70.5 and over are not eligible to contribute to traditional IRA, but Roth contributions are still an option.
- Contributions are limited to taxable compensation for the year. For married-filing-joint taxpayers, one spouse’s taxable compensation may allow a spouse without sufficient taxable compensation for the year to contribute to their own IRA.
- You can withdraw your money at any time, though non-qualified withdrawals (generally distributions prior to age 59.5) may incur tax and penalties. There are certain exceptions to the age 59.5 rule; consult your tax advisor or visit www.irs.gov for more on the exceptions.
Depending on your filing status, your income level, and whether you or your spouse are covered by a retirement plan at work, deductible traditional contributions and Roth contributions may be limited or completely phased out. For example, a married couple with income over $194,000 cannot contribute to Roth IRA, nor can either deduct traditional IRA contributions if one spouse is covered by a plan. Visit www.irs.gov for the different income limitations based on your filing status and plan coverage.
Is your income too high to contribute to Roth or deduct an IRA contribution? Consider a non-deductible IRA contribution. Ask your advisor whether a “back-door Roth IRA” may make sense for you.
How DHJJ Financial Advisors Can Help
Don’t let another year go by without contributing to your IRA or Roth, if you are able. Ask your financial advisor or tax professional to assist in the specifics of your eligibility, including whether a traditional or Roth makes more sense for you should you qualify for both.