Answers to Common Questions about IRAs
Using an individual retirement account (IRA) to build your retirement nest egg can be a tax-savvy move. Here are some answers to commonly asked questions about IRAs; your tax and financial advisors can tell you more.
Can I contribute to an IRA?
You can generally contribute to an IRA if you received taxable compensation, such as wages, salaries, and tips, during the year. Additionally...
- You must be under age 70½ at the end of the year to contribute to a traditional IRA.
- Your income must be under a certain amount to contribute to a Roth IRA. (Roth IRAs do not have an age limit)
Can I contribute to an IRA if I have a retirement plan at work?
Yes. Even if you participate in a retirement plan at work, you can still contribute to an IRA. However, the deductibility of your traditional IRA contributions may be impacted.
Will my contributions be tax deductible?
It depends. Contributions to a Roth IRA are never tax deductible. Instead, earnings grow tax-free in a Roth IRA and qualified withdrawals are tax-free.
You can deduct contributions to a traditional IRA if you (and your spouse, if married) are not covered by a retirement plan at work. If you (or your spouse) are covered at work, your income must be below a certain limit to deduct your IRA contributions. To give an example, the modified adjusted gross income of a single taxpayer who is covered at work must be $61,000 or less in 2015 to fully deduct their IRA contribution.
Which type of IRA should I choose?
The answer to this question will depend on your financial situation and outlook.
If you are eligible to deduct contributions to a traditional IRA, choosing it will reduce your current taxes. This may be an attractive option for someone who is taxed heavily now and expects to be taxed at a lower rate in retirement when withdrawals of deductible contributions and investment earnings will be taxed as ordinary income.
If you are eligible to contribute to a Roth IRA, choosing it will allow your investment earnings to grow tax-free and you to make tax-free qualified withdrawals in retirement, which may be attractive to someone with many years to go before retirement or who expects to be taxed more heavily in retirement.
Your best bet it to seek advice from your financial advisor about which type of IRA may be better for you.
Can I contribute to my IRA if I am not employed?
Yes, but only if you are married, your spouse has taxable compensation, and you file a joint tax return. The amount of your combined IRA contributions must not exceed your spouse’s taxable compensation.
Can I roll over savings to an IRA after age 70½?
You bet. Although you cannot contribute new money to a traditional IRA during or after the year you reach 70½, you can still transfer savings from another retirement account to a traditional or Roth IRA.
Can I contribute to an IRA for my child?
If your child receives wages from a job, you can contribute to his or her IRA.
Just as with an adult’s IRA, contributions to your child’s IRA will be limited to the child’s annual taxable compensation or the IRA contribution limit, whichever is less. For example, if your child earned $5,000 in wages in 2015 when the IRA contribution limit was $5,500, the most that can be contributed is $5,000.
Starting to save in an IRA as soon as a child is employed maximizes the time that the savings have to compound. Think of it: A $5,000 contribution for 2015 that earns, say, 6% annually will amount to $54,787 in forty years and $99,680 in fifty years, thanks to the power of compounding. Of course, this is a hypothetical example, your results will vary, and it is possible to lose money when investing. But IRAs offer you a great opportunity to introduce your child at an early age to the importance of saving and investing for long-term goals.
PLEASE NOTE: Withdrawals of tax-deductible contributions and earnings prior to age 59½ are subject to a 10% tax penalty unless you qualify for an exception.
With offices in Williston and Rutland, Vermont, Copper Leaf Financials’ team of experienced financial planners include Certified Public Accountants (CPAs). Licensed CPAs have long been considered the standard for financial knowledge, objectivity and integrity, prepared to handle the most demanding and complex decisions about taxes, retirement, estate planning, investments and insurance. Shouldn’t the person who assists you with your planning and wealth management also understand the complexities of your tax situation? Make sure that your plan is “CPA Strong”. Visit www.copperleafffinancial.com or call 802-878-2731.