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IRA Investments

IRA's are always in fashion.

Second only to 401k's in maximizing your return, IRAs provide a good retirement investment.  Unlike 401k's you don't get a company contribution for your investment; however, you do get tax advantages.  Depending upon your salary, these advantages could be significant.

Traditional Versus Roth IRAs

There are two types of IRA's, Traditional and Roth, and their characteristics are quite different.  The following table illustrates this:

Features
Traditional IRA
Roth IRA
Who can contribute
Anyone with Earned Income who will be less than 70 1/2 years old at year end
Anyone with Earned Income whose Adjusted Gross Income does not exceed a certain annual limit.
Is the contribution tax deductible?

Contributions may be deductible, depending on income.

No, it is never tax deductible.
Does the investment grow tax free?
Yes, but you must pay taxes an any pre-tax contribution when you withdraw funds.
Yes, and no taxes are paid on withdrawals.
When can money be withdrawn?

Anytime; however, a 10% additional tax generally applies if you withdraw or use IRA assets before you are age 59 1/2.

Any time after a 5-yr. waiting period; however, a 10% additional tax generally applies if you withdraw or use IRA assets before you are age 59 1/2.

When are mandatory withdrawals required?

You must receive at least a minimum amount for each year starting with the year you reach age 70 1/2.

Never

Annual Contribution Limits are the same for Traditional and Roth IRAs:

Tax Year Normal Catch-up Total
2012 $5,000 $1,000 $6,000
2013 $5,500 $1,000 $6,500
2014 $5,500 $1,000 $6,500
2015 $5,500 $1,000 $6,500
2016 $5,500 $1,000 $6,500
2017 $5,500 $1,000 $6,500
2018 $5,500 $1,000 $6,500
2019 $6,000 $1,000 $7,000
2020 $6,000 $1,000 $7,000
2021 $6,000 $1,000 $7,000

Contributions to a Roth IRA

The amount that you can contribute to a Roth IRA is based on your Modified Adjusted Gross Income (MAGI):

2020 2021
Filing Status MAGI Allowed Contribution MAGI Allowed Contribution
Married filing jointly or qualifying widow(er)
< $196,000 Up to the Limit < $198,000 Up to the Limit
≥ $196,000 but
< $206,000
A Reduced Amount
≥ $198,000 but
< $208,000
A Reduced Amount
≥ $206,000
Zero
≥ $208,000
Zero
Married filing separately and lived with spouse at any time during the year
< $10,000
A Reduced Amount
< $10,000
A Reduced Amount
≥ $10,000
Zero
≥ $10,000
Zero
Single, head of household, or married filing separately and did not live with spouse at any time during the year
< $124,000
Up to the Limit
< $125,000
Up to the Limit
≥ $124,000 but
< $139,000
A Reduced Amount
≥ $125,000 but
< $140,000
A Reduced Amount
≥ $139,000
Zero
≥ $140,000
Zero

Tax Deduction for Contributions to a Traditional IRA

If you are not covered by a retirement plan at work and are:
  • Single, head of household, or qualifying widow(er) or
  • Married filing jointly or separately with a spouse who is not covered by a plan at work, then

You can take a full deduction up to the amount of your contribution limit.

If you are covered by a tax-qualified plan, contributions to a Traditional IRA are deductible based on your Modified Adjusted Gross Income (MAGI):

Tax Year MAGI Amount
Fully Deductible if This Amount or Lower Partially Deductible if Between These Amounts Not Deductible if This Amount or Higher
Tax Deductibility for Single tax filers or Head of Household:
2020 $65,000 $65,001 - $74,999 $75,000
2021 $66,000 $66,001 - $75,999 $76,000
Married Filing a Joint Return or Qualifying Widow(er):
2020 $104,000 $104,001 - $123,999 $124,000
2021 $105,000 $105,001 - $124,999 $125,000
Married Filing a Separate Return:
2020 $0 - $9,999 $10,000
2021 $0 - $9,999 $10,000

If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "single" filing status.