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.
Types of IRAs
There are 5 types of IRAs:
- Traditional IRAs which are funded with pretax dollars.
- Roth IRAs where contributions are made with taxed income.
- Rollover IRAs which are funded with money from a former employer-sponsored 401(k) that doesn’t incur early withdrawal penalties.
- SEP IRAs (Simplified Employee Pension IRAs) which are designed for self-employed individuals and small business owners.
- SIMPLE IRAs (Savings Incentive Match Plan for Employees) which are designed for small businesses with 100 or fewer employees.
Traditional Versus Roth IRAs
There are two major types of IRAs for the average investor, Traditional and Roth, and their characteristics are quite different. The following table illustrates this:
|
Features
|
Traditional IRA
|
Roth IRA
|
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Who can contribute
|
Generally, anyone with Earned Income.
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Anyone with Earned Income whose Adjusted Gross Income does not exceed a certain annual limit.
|
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Is the contribution tax deductible?
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Contributions may be deductible, depending on income. |
No, it is never tax deductible.
|
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Does the investment grow tax free?
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Yes, but you must pay taxes on any pre-tax contribution when you withdraw funds.
|
Yes, and no taxes are paid on withdrawals.
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When can money be withdrawn?
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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. |
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When are mandatory withdrawals required?
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You must receive at least a minimum amount for each year starting with the year you reach age 73. This increases to age 75 in 2033. |
Never
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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 |
| 2022 | $6,000 | $1,000 | $7,000 |
| 2023 | $6,500 | $1,000 | $7,500 |
Setting Up an IRA
IRAs can be set up with a bank or other financial institution, life insurance company, mutual fund or stockbroker. Anyone with earned income can contribute to an IRA within certain limits shown here. They can begin contributions at any age (except for SEP IRAs) as long as their contribution doesn't exceed their taxable income, and based on recent legislation can continue to any age.
Contributions to a Roth IRA
The amount that you can contribute to a Roth IRA is based on your Modified Adjusted Gross Income (MAGI):
| 2022 | 2023 | |||
| Filing Status | MAGI | Allowed Contribution | MAGI | Allowed Contribution |
|
Married filing jointly or qualifying widow(er)
|
< $204,000 | Up to the Limit | < $218,000 | Up to the Limit |
|
≥ $204,000 but
< $214,000
|
A Reduced Amount |
≥ $218,000 but
< $228,000
|
A Reduced Amount | |
|
≥ $214,000
|
Zero
|
≥ $228,000
|
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
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≥ $10,000
|
Zero
|
|
|
Single, head of household, or married filing separately and did not live with spouse at any time during the year
|
< $129,000
|
Up to the Limit
|
< $138,000
|
Up to the Limit
|
|
≥ $129,000 but
< $144,000
|
A Reduced Amount
|
≥ $138,000 but
< $153,000
|
A Reduced Amount
|
|
|
≥ $144,000
|
Zero
|
≥ $153,000
|
Zero
|
|
Tax Deduction for Contributions to a Traditional IRA
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 |
| 2022 | $68,000 | $68,001 - $77,999 | $78,000 |
| 2023 | $73,000 | $73,001 - $82,999 | $83,000 |
|
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 |
| 2022 | $109,000 | $109,001 - $128,999 | $129,000 |
| 2023 | $116,000 | $116,001 - $135,999 | $136,000 |
|
Married Filing a Separate Return:
|
|||
| 2020 | $0 - $9,999 | $10,000 | |
| 2021 | $0 - $9,999 | $10,000 | |
| 2022 | $0 - $9,999 | $10,000 | |
| 2023 | $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.
Traditional IRA Contributions if No Retirement Plan
If you are not covered by a retirement plan at work and are:
You can take a full deduction up to the amount of your contribution limit ($6,500 or $7,500 in 2023). |
Traditional IRA Contributions for Certain Married Individuals
If you are married and your spouse is covered by a retirement plan at work and you aren’t, and you live with your spouse or file a joint return, the amount that you can contribute is based on your Modified Adjusted Gross Income (MAGI) as follows:
| Tax Year | MAGI Amount | ||
| Fully Deductible if This Amount or Lower | Partially Deductible if Between These Amounts | Not Deductible if This Amount or Higher | |
| 2022 | $204,000 | $204,001 - $213,999 | $214,000 |
| 2023 | $218,000 | $218,001 - $227,999 | $228,000 |