An Individual Retirement Account (or Individual Retirement Arrangement, as the IRS technically calls them) is a great way to save for retirement. You can get tax breaks for investing through them -- the government wants to encourage you to save for your future -- and you can open an IRA with any brokerage firm, and use it to invest in any type of security you want.
The only downside to IRAs is that the government limits those generous tax breaks: The accounts have annual contribution ceilings that restrict how much you can invest per year. And if you miss out on contributing for any given year, your chance to claim the tax break for that year is lost forever.
The good news is, if you haven't yet contributed to an IRA for 2017, it's not too late.
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You can still make a 2017 IRA contribution
IRA contributions for the 2017 tax year can be made until April 17, 2018 -- the day your tax return is due. For 2017, you're allowed to contribute up to $5,500 to a Traditional or Roth IRA -- though if you're 50 or older, you can make an additional $1,000 catch-up contribution. And, if you're self-employed, you could contribute to a SEP IRA or Simple IRA, both of which have higher contribution limits.
Funds you invest through a Traditional, SEP, or SIMPLE IRA are deducted from your taxable income -- and you don't have to itemize to take the deduction. So if, for example, your income puts you squarely within the 25% marginal tax bracket, a $5,500 IRA contribution would save you $1,375 on taxes, boosting your refund or reducing how much you owe.
Contributions to a Roth IRA don't reduce your taxable income at all when you make them. However, when you're a senior, you'll be able to withdraw that money -- and any profits you accrue from investing it -- tax free (provided you comply with rules for distributions). If you expect to be in a higher tax bracket when you retire than you're in now, contributing to a Roth IRA could be an excellent way to save and invest. And again, there's still time to retroactively do that for 2017.
Are you eligible to contribute to an IRA?
If neither you nor your spouse are covered by a workplace retirement plan, you're eligible to contribute to a Traditional IRA no matter how much money you make.
However, if either you or your spouse is covered by a workplace retirement plan, you could lose eligibility to deduct if your household income is too high. Here are the limits for Traditional IRA contributions:
- If you're single or file as head of household and have a workplace retirement plan, the IRA deduction begins to phase out when your income exceeds $62,000, and vanishes when it's above $72,000.
- If you're married and file as married filing separately, your deduction phases out with an income between $0 and $10,000, if either you or your spouse are covered by a workplace retirement plan.
- If you're married, file taxes jointly, and have a retirement plan at work, the deduction starts to phase out when your combined income hits $99,000, and is unavailable to you if it's above $119,000.
- If you're married and file taxes jointly, and only your spouse is covered by a workplace retirement plan, your deduction starts to phase out when your combined income exceeds $186,000, and drops to zero if your combined income exceeds $196,000.
Income limits for a Roth IRA are not entirely the same. This table shows the amounts you can earn and still contribute to a Roth IRA for 2017.
| Roth IRA Contribution Type | Single or Head of Household | Married Filing Jointly or Qualifying Widow(er) | Married Filing Separately |
|---|---|---|---|
| Full contribution | Less than $118,000 | Less than $186,000 | $0 |
| Partial contribution | $118,000 to $132,999 | $186,000 to $195,999 | $0 to $9,999 |
| No contributions permitted | $133,000 or more | $196,000 or more | $10,000 or more |
Data source: IRS.
Why you should contribute to an IRA
Contributing to an IRA is smart because you get to invest for your retirement, and the government essentially subsidizes it by giving you a tax break, either now or later. If you contribute $5,500 right now for the 2017 tax year, that contribution alone should be worth more than $40,000 in 30 years, assuming a (fairly reasonable) 7% average annual rate of return on your investments.
And, if you make $5,500 contributions every year for the next 30 years, you'd end up with almost $520,000 -- considerably more than most people have socked away when they reach retirement.
If you don't have an IRA yet, you can open one at any brokerage firm and transfer money in online. If you already have an IRA, just invest. And if you don't have $5,500 to contribute, any smaller amount you save will still give you a tax benefit, and help you build a more secure future. So put at least some money in the account in the next few days -- before it's too late.
