Traditional IRA
IRS Representation
What Is An IRA?
An individual retirement account, commonly known as an IRA, is a trust (think of it as an investment account) created for your retirement. It allows you to put money into it pre-tax. For example, if I made $60,000 for the year, and put $5,000 into an IRA, I would only be taxed on $55,000. In 2019, the limit is $6,000 per taxpayer. If you are age 50 or over, you may contribute an additional $1,000.
Who Can Contribute?
You can contribute to an IRA if you are under 70 ½ years old and have earned income. There’s a long list of what Earned Income is and I don’t want to bore you with it, so consider yourself as having Earned Income if you have a job or you own a profitable business that you are actively engaged in. There are some other details that may affect your ability to contribute, but they don’t affect most middle-class taxpayers (If you’re reading this, you’re probably in the middle class as the wealthy have personal accountants that handle this sort of thing for them).
What If I Have A Retirement Plan From My Job?
Contributions to an IRA are fully deductible, regardless of income level, if neither you nor your spouse has an employer-sponsored retirement plan. If you forgot if you do, look at Box 13 on your W-2. If it’s checked, you have an employer-sponsored retirement plan. However, that doesn’t necessarily mean you can’t contribute to an IRA. If you are single and have an employer plan, the IRS deduction begins to phase out between $64,000 and $74,000. For Married Filing Jointly Filers, it begins to phase out between $103,000 and $123,000. , especially if you cannot afford to pay.
Deadlines
IRA’s must be funded not by Dec 31th, but by April 15th of the following year (or whatever date is the last day to file). If you’re a small business owner, talk to us about a SEP if you need a retirement planning vehicle that allows you to contribute clear to the extension deadline.
When Can I Take IRA Distributions?
You can take distributions once reach age 59 ½. If you take a distribution before then you’ll be hit with a 10% penalty. There are many exceptions but they’re all pretty rare and I usually don’t advise people to take a distribution before retirement even if an exception applies. Distributions become mandatory by April 1 of the year following the year you reach age 70½.
Traditional IRA Versus A Roth IRA
Contributions to a Traditional IRA are tax-deductible but distributions are taxable. Contributions to a Roth IRA are taxable but distributions are tax-deductible. Both have their strengths, but for most people, I like the Traditional IRA better. The reason why is that most people will be in a lower tax bracket in their retirement years than they are in their working years. This means that their distributions will probably be taxed at a lower rate.
