An IRA Refresher
The almost-annual changes to the income tax laws have created confusion
about Individual Retirement Accounts (IRAs). This confusion has caused
many people to ignore one of the most powerful tools available to help
them secure a solid financial future.
Even with all the
changes, IRAs can and should be a key part of the foundation of most people's
retirement planning efforts. Here are some of the facts you should know
to make fully informed IRA decisions:
and Roth IRAs
- The annual contribution
limit for 2017 is $5,500. In subsequent years, the limit will be adjusted
annually for inflation in $500 increments. The only requirement is that
you have at least that much income from wages or salaries.
- Individuals ages
50 and older are able to make additional catch-up contributions. The
limit for these additional contributions is $1,000.
- Your contribution
to a "regular IRA" is tax-deductible if you are not a participant
in your employer's qualified retirement plan. If you are a participant
in a qualified retirement plan, the deductibility of contributions to
regular IRAs is determined by your modified adjusted gross income (MAGI).
For married couples in 2017, the deduction is phased out at MAGI levels
between $99,000 and $119,000.
- Earnings on funds
within an IRA are not subject to income tax as they are earned. Tax
deferral allows for the funds to accumulate faster. With a "regular
IRA", earnings are taxed when withdrawn from the IRA.
- IRAs were established
to be long-term retirement planning accounts. As such, the IRS imposes
a penalty tax of an additional 10% if funds are distributed before reaching
age 59 ½. There are a few exceptions to this rule, including
a first time home purchase.
- If you have established
IRAs at different institutions over the years, you can consolidate them
into one account to make it easier to keep track of your funds. If done
properly, there are no income tax consequences to this consolidation.
- IRAs can serve
as the account to receive a distribution from your employer's qualified
plan when you change employers or retire. Tax deferral is maintained
and you may have additional investment flexibility.
- You must begin
taking distributions from a regular IRA at age 70 ½.
- The biggest differences
are that the contributions are not tax deductible and that distributions
are not subject to income tax. The other difference is that Roth IRA
contributions are not allowed if your modified adjusted gross income
exceeds certain levels.
- For single filers
in 2017, full contributions are allowed if your MAGI is less than $118,000,
partial contributions are allowed if your MAGI is between $118,000 and
$133,000 and no contributions are allowed if your MAGI is above $133,000.
For married couples filing joint returns, full contributions are allowed
if your MAGI is below $186,000, partial contributions if your AGI is
between $186,000 and $196,000 and no contributions are allowed if your
MAGI is over $196,000.
When comparing regular
and Roth IRAs, the trade-off is usually whether the loss of deductibility
on current contributions with a regular IRA is worth the benefit of never
having to pay income tax on distributions from a Roth IRA. Roth IRAs also
provide more distribution flexibility. For many, the Roth IRA can result
in superior long-term benefits.
Some General Guidelines
- If you can afford
it, contributions to both an IRA and a 401(k) plan can help you accumulate
funds faster. If you can only do one, the 401(k) should probably be
chosen because of possible employer matches and deductibility of contributions.
- The value of the
tax deferral on earnings within a regular IRA increases the longer the
funds are in the IRA.
contributions to a Roth IRA should be considered carefully in lieu of
deductible contributions to a regular IRA.
- Special rules cover
the conversion of regular IRAs to Roth IRAs. The advantages can be large
but there will be a current tax liability.
- Be sure to consult
with a qualified advisor to determine how these rules may apply to your