Many consider making contributions to an IRA (Individual Retirement Account) for tax-saving purposes. When contributing, it is important to do so properly to avoid incurring IRS penalties, taxes, and additional added interest. Specific qualifications and limitations should be thoroughly reviewed before participating. Taking a look at contribution limits, for 2018, the limit for those 50 and under was $5,500 and for those 50 and over, the contribution limit was $6,500. This year, the contribution limit is $500 higher than last year – $6,000 for those 50 and under and $7,000 for those 50 and over.
Fast Fact: Dependent on whether you are partaking in Traditional IRA or Roth IRA, the benefits differ at large.
|2018 Contribution Limit||2019 Contribution Limit|
|Under 50 Years Old||Over 50 Years Old||Under 50 Years Old||Over 50 Years Old|
Note: IRA contribution limits for 2018-2019.
IRA provides two separate tax benefits through Traditional IRA and Roth IRA. The benefit of Traditional IRA is that it provides tax deductions for the year that the contribution was made and additionally, the funds grow tax-deferred. However, at the time of withdrawal, income tax is due. For Roth IRA, initially there are no tax deductions, but the funds grow tax-deferred and at the time of withdrawal all the gains are tax-FREE.
It is important to be aware that NOT everyone can partake in IRAs and there is a limitation based on the amount of income earned per person within a household. If you are single, the contribution limit is permitted up to the amount of income you earn or the IRA limit, whichever is higher. In the case that you are married, you are still able to make contributions to the IRA even if you didn’t work as long as your spouse worked and have earned income. If either you or your spouse is partaking in a company enrolled retirement plan, your Traditional IRA deduction and ability to participate in Roth IRA is determined by the joint income limit. If your joint income is above $121,000, even if you contributed to your Traditional IRA, the amount that you contributed to the traditional IRA may not be tax deductible. If your joint income is above $191,000, you may not be eligible to participate in Roth IRA at all.
In order to avoid unnecessary taxes and penalties for participating in IRAs when ineligible, consulting with a tax adviser/preparer and/or financial professional is advisable. In the next article, I will share more detail about specific qualifications and strategies to participate in Traditional and Roth IRAs.