What Is An IRA?
An individual retirement account, commonly known as an IRA, is a trust created for your retirement (think of it as an investment account). 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, $55,000 is the amount I would only be taxed on. In 2019, the limit is $6,000 per taxpayer. You may contribute an additional $1,000 if you are age 50 or over.
Who Can Contribute?
You can contribute to an IRA if you are under 70-and-a-half 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.
Some other details 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 form. If it’s checked, you have an employer-sponsored retirement plan; however, that doesn’t necessarily mean you can’t contribute to an IRA.
The IRS deduction begins to phase out between $64,000 and $74,000 if you are single and have an employer plan. It begins to phase out between $103,000 and $123,000 for Married Filing Jointly filers.
IRAs must be funded by April 15th of the following year (or whatever date is the last day to file), not by December 31st of the year. If you’re a small business owner, talk to us about a Simplified Employee Pension (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 59-and-a-half years of age. If you take a distribution before then you’ll be hit with a ten percent 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 70-and-a-half years of age.
Traditional IRA Versus An 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.
Have more questions about traditional IRAs? Contact me by calling 1-305-363-5429 or by emailing me at email@example.com. You can also reach my office via an easy-to-use online form.