It is a New Year and tax filings for 2018 are just around the corner. Some of you may have questions about possibly contributing to your current IRA or perhaps starting a new one for Tax Year 2018 (deadline for filing on Monday April 15th, 2019). Here are some frequently asked questions that may be useful to know:
What are the rules for IRA contributions?
It depends on what kind of IRA you're talking about. Traditional IRAs and Roth IRAs are each subject to different contribution rules.
You're allowed to contribute up to $5,500 to a traditional IRA in 2018 (unchanged from 2017), as long as you're under age 70½ and you have earned income. The limit for individual retirement accounts increased to $6,000 in 2019 — up $500 from last year's.
In addition, if you're age 50 or older, you can make an extra "catch-up" contribution of $1,000 in 2018 and 2019. You can make your annual contribution up to April 15 of the following year, either in a series of payments or in one lump sum. The beauty is that practically anyone who has a paying job can set up and contribute to a traditional IRA. Also, if you meet certain conditions, you may be able to contribute an additional $5,500 in 2018 or $6,000 2019 to an IRA in your spouse's name (plus an additional $1,000 catch-up contribution if your spouse is age 50 or older), even if your spouse has little or no income. However, whether or not you can deduct your traditional IRA contributions will depend on several factors, such as your income, your tax filing status, and whether you or your spouse is covered by an employer-sponsored plan. You may be able to deduct all, a portion, or none of your contribution for a given year. You may even qualify for a partial tax credit.
On the other hand, contributions to Roth IRAs are never tax deductible, but a tax credit may be available and qualifying distributions will be tax free. Also, even though the same dollar caps on yearly contributions apply to Roth IRAs ($5,500 in 2018 and $6,000 in 2019, $1,000 catch-up contribution if age 50 or older), not everyone will qualify to take full advantage of a Roth IRA. The amount you can contribute to a Roth IRA (if anything) will be based on your income and filing status. If you do qualify, you may be able to continue contributing to a Roth IRA after age 70½ — a feature traditional IRAs don't offer. As with traditional IRAs, you may be able to contribute to a Roth IRA on behalf of your spouse.
Keep in mind that your combined annual contribution to all of your IRAs in any given year — Roth and traditional — cannot exceed the overall contribution limit of $5,500 in 2018 or $6,000 in 2019 ($6,500 if you're age 50 or older in 2018 or $7,000 in 2019).
Should I invest in a Roth IRA or a traditional IRA?
There is no easy answer to this question. Traditional IRAs and Roth IRAs share certain general characteristics. Both feature tax-deferred growth of earnings and allow you to contribute up to $5,500 in 2018 (unchanged from 2017) of earned income, plus an additional $1,000 "catch-up" contribution if you're 50 or older. The limit for individual retirement accounts increased to $6,000 in 2019 — up $500 from last year year's. Both allow certain low- and middle-income taxpayers to claim a partial tax credit for amounts contributed. But important differences exist between these two types of IRAs. In fact, the Roth IRA is in some ways the opposite of the traditional IRA.
A traditional IRA allows anyone with earned income who is under age 70½ to contribute the maximum $5,500 in 2018 and $6,000 in 2019, plus catch-up if eligible. However, your ability to deduct traditional IRA contributions will depend on your annual income, your filing status, and whether you or your spouse is covered by an employer-sponsored plan. You may be able to deduct all, a portion, or none of your contribution for a given year. Any distribution from a traditional IRA will be subject to income taxes to the extent that the distribution represents earnings and deductible contributions. You may also be hit with a 10% early withdrawal penalty if you draw money out before age 59½ (there are exceptions to this rule). Beginning at age 70½, you must begin to take annual distributions from a traditional IRA.
With a Roth IRA, no age limitation applies to contributions. As long as you have taxable compensation and qualify, you can contribute to a Roth IRA even after age 70½. However, your ability to contribute and the amount you'll be able to contribute (up to the annual limit) will depend on your income and tax filing status. Although Roth IRA contributions are not tax deductible, Roth IRAs have other advantages. You're not required to take distributions from a Roth IRA at any age, which gives you more estate planning options. Another key strength: Qualified withdrawals will avoid both income tax and the early withdrawal penalty if certain conditions are met. Non-qualified withdrawals will be taxed and penalized only on the earnings portion of the withdrawal, since the principal is your own after-tax money.
Your personal goals and circumstances will determine which type of IRA is right for you. If you wish to minimize taxes during retirement or preserve assets for your heirs, a Roth IRA may be the way to go. A traditional IRA may make more sense if you can make deductible contributions and want to lower your taxes while you're still working.
It's January, and I forgot to contribute to my IRA. Is it too late?
No. Generally speaking, the IRS allows you to make your IRA contribution for a particular tax year up until April 15 of the following year (Monday April 15th, 2019). This rule applies to both traditional IRAs and Roth IRAs, giving you some flexibility in terms of the timing of your annual IRA contribution. Up until April 15th, 2019, you can contribute a total of $5,500 to all the IRAs you own in 2018 (unchanged from 2017). In addition, if you're age 50 or older, you can make an extra "catch-up" contribution of $1,000 a year in 2018.
Note that you can make your annual IRA contribution in a series of payments rather than in one lump sum. For example, let's say you wanted to invest the maximum amount in your IRA for last year (2018). You could have either made a lump-sum contribution of $5,500, or you could have set up a savings plan whereby you invest a fixed amount each month in your IRA. Because you're allowed to spread your 2018 IRA contribution over a 15½-month period (January 1, 2018 through April 15, 2019), your monthly investments into your IRA would have been as little as $354.83 and still end up contributing the full $5,500.
Feel free to contact our team with any additional questions for your specific situation.