There are several distinct types of IRAs, each with eligibility restrictions based on variables such as income, age, filing status, employment status and other retirement plans. Working with your tax advisor, here are 10 things to know about IRAs and saving for retirement:
- Total Contribution Limits – For 2017 and 2018, total combined contributions for both a traditional and Roth IRAs cannot be more than $5,500 ($6,500 if you’re age 50 or older). Additionally, your contribution cannot be more than your taxable compensation for the year. An IRA contribution limit does not apply to rollover contributions.
- Qualifying Traditional IRAs Contributions are Tax Deductible – Your traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your adjusted gross income (AGI) exceeds certain levels. For 2017, if you have a retirement plan, your deduction phases out at AGI of $72,000 (single or head of household), $119,000 (married filing jointly), or $10,000 (married filing separately). For 2017, if you (and your spouse) do not have a retirement plan, you can deduct up to your contribution. If you or your spouse has a retirement plan, then your deduction phases out at AGI of $196,000 (married filing jointly), or $10,000 (married filing separately). For 2018, if you have a retirement plan, your deduction phases out at AGI of $73,000 (single or head of household), $121,000 (married filing jointly), or $10,000 (married filing separately). For 2018, if you (and your spouse) do not have a retirement plan, you can deduct up to your contribution. If you or your spouse has a retirement plan, then your deduction phases out at AGI of $199,000 (married filing jointly), or $10,000 (married filing separately).
- Some IRA Contributions Stop at Age 70.5 – Regular contributions to a traditional IRA in the year you reach 70.5 and thereafter are not allowed. Roth IRA contributions are allowed at any age. SEP IRA contributions are allowed at any age as long as you have earned income.
- Retirement Plan Rollover to Similar Plan Types Are Allowed – You can generally rollover all retirement plan types to other similar plan types or a Roth IRA. For example, you can rollover a 401(k) to a traditional IRA or a Roth IRA. However, if you rollover from a non-Roth plan to a Roth plan, you must include the amount in income. For example, you can rollover your 401(k) to a traditional IRA with no tax consequence, but if you rollover your 401(k) to Roth IRA you have to include the rollover amount in income. If you rollover a Roth 401(k) to a Roth IRA, there is no tax consequence.
- A Non-Working Spouse Can Contribute to an IRA – Even if a spouse does not have income, they can open and contribute to an IRA, provided the other spouse is working and the couple files a joint federal income tax return.
- A Nondeductible IRA is Still Worthwhile – If you qualify for a tax-deductible contribution, you can still have an IRA. If you’re covered by a retirement savings plan at work (for example, a 401(k) or 403(b)) and your 2017 modified adjusted gross income (MAGI) exceeds certain income limits, your contribution might not be tax deductible but contributing to an IRA will still allow your money to grow tax-free until retirement. You also have the option of converting to a Roth IRA.
- Alimony is Income – Alimony counts as earned income and may qualify you to contribute up to the contribution limit, not to exceed your income.
- SEP IRA for Your Business – Whether you are self-employed or have a full-time job with a side business, you may qualify for a SEP IRA in addition to a traditional or Roth IRA. The SEP IRA is like a traditional IRA but you can contribute 25% of pretax business income up to a $54,000 limit for 2017.
- A Roth IRA for Children with Taxable Income – If a child has taxable earned income, you can open a Roth IRA. You can also gift to an IRA on behalf of a child or grandchild but the contribution can’t exceed the amount the child’s taxable earned income.
- Roth IRA Distribution Benefits – Traditional, SEP and SIMPLE IRAs require minimum distribution at age 70.5. Roth IRA contributions are generally available any time without tax or penalty, qualified withdrawals are tax-free, and there is no required minimum distributions at age 70.5.
Contributing Author: Don B. Saulic, CFP® CPA, Partner, Private Wealth Management, YMCA of Orange County Board of Directors
You have worked hard and saved for your retirement and your hard work has paid off. Now use your savings to create your legacy by making an IRA charitable rollover gift. If you are 70½ or older you can use your individual retirement account (IRA) to support our cause. Making an IRA charitable rollover gift will lower income and taxes from your IRA required minimum distribution this year.
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