If you are opening an IRA for the first time or need a refresher course on the specifics of IRA ownership, here are some facts for your consideration.
Contribution limits. In general, the most you can contribute to an IRA for 2017 is $5,500. If you are age 50 or older, you can make an additional “catch-up” contribution of $1,000, which brings the maximum annual contribution to $6,500
Eligibility. One potential area of confusion around IRAs concerns an individual’s eligibility to make contributions. In general, Internal Revenue Service guidelines state that you must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income. If you are married and file a joint tax return, only one spouse needs to have compensation in most cases.
With regard to Roth IRAs, income may affect your ability to contribute. For tax year 2017, individuals with an adjusted gross income (AGI) of $118,000 or less may make a full contribution to a Roth IRA. Married couples filing jointly with an AGI of $186,000 or less may also contribute fully, up to $5,500 for the year. Contribution limits begin to decline, or “phase out,” for individuals with AGIs between $118,000 and $133,000 and for married couples with AGIs between $186,000 and $196,000. If your income exceeds these upper thresholds, you may not contribute to a Roth IRA.3
Deductibility. Whether you can deduct your traditional IRA contribution depends on your income level, marital status, and coverage by an employer-sponsored retirement plan. For instance:3
- If you are single, your traditional IRA contribution for 2017 will be fully deductible if your AGI was $62,000 or less. The amount you can deduct begins to decline if your AGI was between $61,000 and $72,000. Your IRA contribution is not deductible if your income is equal to or more than $72,000.
- If you are married, filing jointly, your 2017 IRA contribution will be fully deductible if your combined AGI is $98,000 or less. The amount you can deduct begins to phase out if your combined AGI is between $99,000 and $119,000. Neither of you can claim an IRA deduction if your combined income is equal to or more than$119,000.
- If neither you nor your spouse is covered by an employer-sponsored retirement plan, your contribution is generally fully deductible up to the annual contribution limit or 100% of your compensation, whichever is less.
Keep in mind that contributions to a Roth IRA are not tax deductible under any circumstances.
You can begin withdrawing money from a Traditional IRA without penalty at age 59½. Generally, deductible contributions and earnings are taxable at the then-current rate. Nondeductible contributions are not taxable because those amounts have already been taxed.
You must begin receiving minimum annual distributions from your Traditional IRA no later than April 1 of the year following the year you reach age 70½ and then annually thereafter.If your distributions in any year after you reach 70½ are less than the required minimum, you will be subject to an additional federal tax equal to 50% of the difference.
Unlike Traditional IRAs, Roth IRAs do not require the account holder to take distributions during his or her lifetime. This feature can prove very attractive to those individuals who would like to use the Roth IRA as an estate planning tool.
If you would like to set up a time to meet with one of our wealth advisors to set up an IRA, please contact our office at 763-231-9510. All initial consultation are free of charge.
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nicole Middendorf and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.