With just a few days left before we tick over to a new calendar year the sprint has begun for Americans to make a number of last minute tax moves. As of 11:59 p.m. on Dec. 31, 2014 nearly all tax implications for 2014 will be set in stone, with one big exception of course: individual retirement accounts.
Individual retirement accounts, or IRAs, provide certain tax advantages for individuals saving up for their retirement. They're accounts funded solely by you, not your employer, and they can make all the difference between simply retiring, and retiring comfortably on your own terms. According to the Employee Benefit Research Institute as of 2010 IRAs made up 26.5% of all retirement holdings, or a little over $1 trillion based on its figure. In short, IRAs have become a critical saving tool for the American public.
With that in mind, let's take a closer look at four critical things you need to know about your 2015 IRA contribution limits.
1. How much can I contribute?
First of all, it pays to know exactly how much you can contribute in the upcoming year. Thankfully, your 2015 IRA contribution limit is unchanged from 2014, unless you happen to turn 50 years old. Those aged 49 and under can contribute up to $5,500 this year, while individuals aged 50 and older are able to use the catch-up clause built into IRA accounts to contribute a maximum of $6,500 in 2015.
2. Phase-out eligibility
Despite not having to be connected to an employer, 2015 IRA contribution limits are subject to you meeting certain modified adjusted gross income requirements.
As you can see in the table above, as an example, if you're single and make less than $116,000 in modified AGI in 2015 you can contribute up to the maximum limit of $5,500 or $6,500, depending on your age. If, however, you made between $116,000 and $131,000 then your contribution limit is reduced. Anything more than $131,000 in modified AGI for a single filer eliminates their ability to contribute to an IRA.
In other words, have a good understanding of how much you stand to earn in 2015.
3. Age eligibility
The two most common types of IRAs are Traditional IRAs and Roth IRAs, and they both have different requirements with regard to when someone can or can't contribute. Traditional IRAs, for instance, require that contributions cease in the year that a plan owner turns 70.5 years old. A Roth IRA, on the other hand, has no such age requirement, meaning plan participants can continue making contributions of up to $6,500 well beyond their 70th birthday should they so choose.
4. Understanding what you can and can't deduct
Your 2015 IRA contribution limit can also have a substantial effect on your current year taxes, or potentially alter your taxes many years down the road.
A Traditional IRA allows for immediate tax deductions for the current year based on the amount you contribute, up to your 2015 IRA contribution limit. You can also make a Traditional IRA (or Roth IRA) contribution up until April 15 of the following year and retroactively apply that deduction to your current year taxes. This means if you still want to contribute up to $5,500 or $6,500 (assuming you're eligible to do so) in an IRA you can do so for the 2014 tax year up until April 15, 2015.
But, Traditional IRAs also have all capital gains earned over the life of the account fully taxed when you begin taking withdrawals between the age of 59.5 and 70.5. A Roth IRA offers no immediate tax benefits to individuals. However, all funds contributed to a Roth IRA can grow completely tax-free over the life of the account. Furthermore, there's no minimum distribution requirement for Roth IRAs, meaning you can let your money continue to grow without being forced to take distributions.
Now that you're up to speed on your 2015 IRA contribution limits and the various tax implications that come with those contributions, it's up to you to consider making what could be a potentially life-changing contribution if you haven't yet hit your limit for 2014.