Many consider making contributions to an IRA (Individual Retirement Account) for tax-saving purposes. When contributing, it is important to check specific qualifications and limitations before participating to avoid incurring possible IRS penalties, taxes, and additionally added interest. For 2018, the contribution limit for those that are under 50 years old is $5,500 and $6,500 for those that are over 50 years old. For 2019, the contribution limit is $500 higher than last year – $6,000 for under 50 and $7,000 for over 50 years old.
Tip: IRA provides two separate tax benefits through Traditional IRA and Roth IRA.
|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.
Tax Benefits and Limitations
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.
Disclosure: Profectus Financial does not provide legal or tax advise. Please consultyour own legal or tax advisor for qualification of any investment or tax strategies. This is for educational purposes only. This is not a soliciation of a particular investment product or company.