My clients are always asking me what the deal is with the individual retirement account (IRA). Don’t worry if you’re totally lost when it comes to retirement accounts. I spend a lot of my time addressing all sorts of IRA-related queries. Like if it’s a good idea to get one even if you’re young. Or why I’m so into this Roth dude that people are constantly talking about talked, and if he’s paying me off? (He isn’t. He also isn’t a “he” either–more on that below). Or what the maximum IRA contribution level is. And will the taxman cut retirees a break, finally? Maybe if I ask super nicely?
Fear not, friends. I’ve got your backs. Here are the five most common questions I get about IRAs, finally answered in plain English.
Question #1: Is My Contribution Tax Deductible?
Maybe. All sorts of things factor into whether you will get a deduction. Some circumstances the taxman considers include whether you’re married, if your job is backing your IRA, what tax bracket you fall into, etc. Depending on those variables, you’ll be placed into one of three categories.
Group 1: No Tax Deductions
Contributions to a Roth IRA aren’t deductible. Never. Sorry about it. That said, contributing to your Roth account is still a good idea. You’ll want to check your modified adjusted gross income (MAGI) . Roth accounts have a cut-off for how much you can earn annually and still be eligible to hold the account at all.
If you’re really looking to save in tax terms, one strategy you can use is maxing out your 401(k) or 403(k) first. You’ll get all the same tax perks of the old-school IRA, and more, since you’re a superstar taking advantage of multiple accounts. You can even have one of these AND an IRA if you want to be super comfortable in retirement.
Group 2: Deductions with Limits
You may fall into this group if either of the following apply to you.
- You or your husband/wife are covered by your employer.
- You or your husband/wife are outside of the allowed income range.
Now you’ll need to be aware of the fact that the IRS changes its parameters on this matter all the time. You’ll want to do some research to ensure your eligibility before moving forward with filing. If this is confusing for you, call your lawyer and ask for help.
Group 3: Total Tax Deductions
You belong to this group if both of the following statements apply.
- You don’t have a retirement plan through your work, and aren’t married to someone who does.
- Your income(s) falls under the IRS cut-off point.
See above for information on income ranges. We’ll talk more about the cut-off points below.
Question #2: Can I Contribute To An IRA Even if I Have It Through My Employer?
You bet! And frankly, you probably should, especially if that employer is matching or offering other incentives to do so. You don’t even have to have a conventional account. SEP (self-employed) or SIMPLE IRA account holders can take advantage of this as well.
You’ll want to note that there are limits to how much you can contribute. You may not be able to deduct the entire amount, but that will depend largely on your circumstances. (See Question #1 for more details on that).
I can already hear some of you saying, “Wait! I’m not covered by my job.” Take a deep breath now. That’s okay. You can still contribute to an IRA. One of the perks of IRA plans is that they’re available to literally anyone: which type (self-directed, Traditional, etc.) is best for you will depend on your circumstances. There’s even the SEP IRA option for self-employed folks. Those contributions could even be deducted entirely depending on your income. Again, consult a CPA on this matter.
Question #3: Is It Possible to Contribute if I Didn’t Earn Anything This Year, But My Spouse Did?
Absolutely. You’ll have to file your taxes jointly to do this, but it’s A-okay with the taxman if only one partner is earning taxable income. It doesn’t matter which individual earned the money you plan to contribute.
As with all things tax-related, there are some restrictions. You have to ensure your contributions don’t exceed those. The limits for 2018 are $5500 in if you’re under the age of 50, or $6500 if you’re over the age of 50.
Question #4: Is There a Way to Contribute To My Roth Account If I Earned Too Much Money In 2018?
The IRS has set the contribution cutoff at $135,000.00 for single individuals and $199,000.00 for couples who file jointly, which up significantly from last year. Some exceptions apply if you are a qualified widower. If you’re married and filing separately, you aren’t eligible for a Roth account. Whether you want to reconsider how you file is up to you.
It comes right down to whether you earned more or less than that figure above. If you’re under that number, you’re good to go. But if you have earned more, your Roth custodian can limit or even freeze your account.
But there are loopholes here if you do earn more than the Roth cut-off. You can use a Traditional IRA (which is available to everyone, regardless of income). Contribute to that, and pay the taxes upfront. Now roll that cash money over to your Roth IRA. Why this is legal is you’ve already paid the taxes, so it’s eligible to transition into the Roth. Pretty cool, right?
Fun fact for all my retirement superstars out there: This tactic was made possible when the IRS removed the income level restrictions for making Roth conversions in 2010.
Question #5: Can I Contribute To My IRA if I’m older than 70½?
Maybe. The type of IRA you use is the critical factor here.
If you’ve gone with the old-school IRA, the answer is no. Once you hit that age, you won’t be able to contribute any further. But if you’ve opted for a Roth IRA, you can still add funds there. You may also move funds between IRA accounts. Barring any unforeseeable and unlikely dramatic changes of law, this will always be true, even if you live into your 100s.
And I sincerely hope you do!
There you have it. Those are the short versions of answers to the five most common IRA questions I get. If there’s a detail still gnawing away at you, or if a question you didn’t see answered above, please use the comments below to ask about anything still on your mind. Thanks for reading!