Saving for retirement is important, and the best way to get started with your retirement goals is to open an IRA. It's easy to get started, but it can be confusing to try to navigate through your choices to make the best decision for your financial situation.
In particular, there are five facts about IRAs that you really need to know. Get a grasp on them, and you'll be well on your way toward choosing the best path forward for reaching your financial goals in retirement.
1. There are two types of IRAs: Traditional and Roth
Most investors can pick between two different types of IRAs. Traditional IRAs allow most people to take a tax deduction for the amount they contribute, giving them immediate tax savings. However, when you make withdrawals from a traditional IRA in retirement, you'll usually have to pay income tax on the amount you withdraw.
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Roth IRAs are different. You don't get a tax deduction for contributions to a Roth IRA, but you can take withdrawals from a Roth in retirement without paying any taxes in most cases. If you're eligible to contribute to either one, then those who are in high tax brackets now will often prefer a traditional IRA contribution, while those in low tax brackets currently could do better using a Roth IRA.
2. How much you can contribute to an IRA
Contribution limits for the 2019 year went up from 2018. If you're younger than 50, then your limit for 2019 is $6,000, up $500 from 2018's levels. Those who are 50 or older can add an extra $1,000, making the total contribution limit $7,000.
Those limits assume that you have at least that much in earned income from a job or self-employment. If you have less in earned income, then your contribution limit will be less. However, spouses are allowed to open spousal IRAs that effectively let them use their spouse's earned income in lieu of their own, so be sure to check and see whether you're eligible on that front even if don't work for pay.
3. Income limits on contributing to Roth IRAs in 2019
Both traditional and Roth contribution limits are the same, but Roth IRAs put further restrictions on participation. If your income exceeds certain levels, then you're not allowed to contribute to a Roth. Others whose income falls in a phase-out range can have lower maximums than the ones previously listed. Following are the income limits that apply for 2018 and 2019.
|
Tax Filing Status |
2018 Tax Year |
2019 Tax Year |
|---|---|---|
|
Single or head of household |
$120,000-$135,000 |
$122,000-$137,000 |
|
Married filing jointly |
$189,000-$199,000 |
$193,000-$203,000 |
|
Married filing separately |
$0-$10,000 |
$0-$10,000 |
Data source: IRS. Note: Those who were married, filed separately, and did not live with their spouse during the year can use the single income limits.
4. Income limits on deducting traditional IRA contributions
You can always make full contributions to a traditional IRA, but in some cases, some or all of what you contribute won't be tax-deductible. As long as you don't have a 401(k) or other retirement plan at work, then you can always deduct whatever you contribute. But if you or your spouse has access to a 401(k), then the deductible amounts can be reduced or eliminated entirely. Following are the income limits for those who have 401(k) coverage at their own job.
|
Tax Filing Status |
2018 Tax Year |
2019 Tax Year |
|---|---|---|
|
Single or head of household |
$63,000-$73,000 |
$64,000-$74,000 |
|
Married filing jointly |
$101,000-$121,000 |
$103,000-$123,000 |
|
Married filing separately |
$0-$10,000 |
$0-$10,000 |
Data source: IRS. Note: Those who were married, filed separately, and did not live with their spouse during the year can use the single income limits.
Meanwhile, if your spouse has 401(k) coverage but you don't, then full deductions are available for those with incomes up to $189,000 in 2018 or $193,000 in 2019. Phase-outs occur between $189,000 and $199,000 in 2017 and between $193,000 and $203,000 in 2018.
5. The deadline for contributions for the 2018 tax year is April 15
You always have until the deadline for filing tax returns to make your IRA contribution for a given year. That means you still have until April 15 to contribute for the 2018 tax year, and you can also make your 2019 contribution at any time this year or early in 2020.
Be smart with IRAs
No matter which type you pick, using an IRA is a great way to boost your retirement savings. But don't wait long, because with just over a month left to make 2018 tax year contributions, you won't want to waste your opportunity to get started as soon as possible.
