Tax season is a great reminder to make retirement account contributions if you don’t do it throughout the year. The good news is that tax laws are written so that you can make contributions for the previous tax year until the tax filing deadline. Even though the calendar year may be over and done with, you can still contribute to your IRA until the tax deadline, which is April 15, in most years. Just take note that if you make IRA contributions between January 2 and April 15th, you may need to specify which tax year you are contributing to because you can also contribute to the current year IRA during these dates.
Traditional IRA and Roth IRA. There are two main types of IRA accounts available to most people – they are the Traditional and Roth IRA. The short and quick explanation is that Traditional IRA contributions are made with pre-tax money, the investments grow tax free, and the money is taxed upon withdrawal. Roth IRA contributions are made with money that has already been taxed. It grows without the drag of taxes and is withdrawn without any additional taxation. There are certain income limits and other rules involved with regarding deductions and eligibility.
Traditional and Roth IRA Contribution Limits
The maximum you can currently invest in a Traditional or Roth IRA is $5,500 if you are under age 50. Those who are age 50 and older are eligible for catch-up contribution of $1,000 and can contribute up to $6,500.
It is important to note that you can only contribute up to the maximum limit across all individual IRA accounts (self-employed retirement plans may have different rules). I am under 50 years old, so I would be able to contribute any combination of $5,500 between any IRAs I decide to open. For example – $3,000 in a Traditional and a $2,500 Roth IRA, or $3,000 in a Roth IRA + $2,500 in a Traditional IRA, etc. so long as it does not exceed $5,500.
Traditional IRA Deductibility and Roth IRA contribution phase out levels
Your ability to make a tax deductible Traditional IRA contribution and Roth IRA qualifications are based on your modified adjusted gross income (MAGI), which is calculated on your tax form. The following numbers are for the 2014 tax year.
Roth IRA phase out. The IRS has specific income restrictions regarding who can contribute to Roth IRAs. The income limits are based on your Roth IRA eligibility begins phasing out for single filers with a MAGI between $114,000 – $129,000, and for married filing jointly between $181,000 – $191,000.
Single filers with a MAGI above $129,000 and married filing jointly with a MAGI above $191,000 are not eligible for Roth IRA contributions. See Roth IRA rules, or IRS pub 590 for more information.
Traditional IRA deduction phase out. The Traditional IRA phase out schedule determines whether or not you can deduct your contributions against your taxes. The phase out for Traditional IRA deductions for single filers begins at $60,000 and ends at $70,000. The range for married filing jointly is between $96,000 and $116,000. It is important to note that tax filers with income limits above the deduction levels can still contribute to a Traditional IRA, however, they will not be able to deduct it against their taxes.
Did you contribute too much to your IRA? The deduction and phase out limits may affect your ability to make contributions. Find out what happens if you contribute too much to an IRA.
More information about IRAs
Individual Retirement Arrangements (IRAs) are great investment vehicles, and I highly recommend investing in one if you are able to do so. The benefits you receive from the tax deferrals are a great way to grow your investments without the drag of taxes slowing you down your investments.
Max out your IRAs if possible. It is important to max out IRA investment if possible because you only have one opportunity to do so. Once the window of eligibility closes, it is closed for good.