Every spring we hear from clients asking questions about IRA accounts. IRS rules vary depending upon type of the account – Roth or Traditional. Here, we’ve outlined some of the most common questions and answers for you.
Q – What’s the deadline for making an IRA contribution?
A – For both Roth and Traditional IRAs, clients have until April 15th to make contributions for the prior tax year. So, to make a 2018 contribution, you need to do so before April 15, 2019.
Q – What is the difference between a Roth and Traditional IRA?
A – A Roth IRA is a tax-advantaged account that grows TAX-FREE, because the money invested in the account is money that has already been taxed. When you take a withdrawal, you will not be taxed on any qualified distributions received. A Traditional IRA is a tax-advantaged account that grows TAX-DEFERRED, because you can deduct these contributions from your income taxes in the year you make the contribution. When you take a withdrawal in retirement, that amount is considered to be taxable income.
Q – How much can I contribute to my IRA?
A – The 2018 contribution limit for both Traditional and Roth IRA is $5,500. If you are over 50 years old, you can contribute an additional $1,000, for a total contribution of $6,500.
The 2019 contribution limit was raised to $6,000. If you are 50 years or older, the same $1,000 catch-up contribution applies for a total limit of $7,000.
Q – How can I avoid the 10% early withdrawal penalty?
A – The easiest way to avoid the early withdrawal penalty is to wait until you are age 59 ½ to take any money out of the account. However, the IRS does allow some exceptions to this rule.
- First time home buyer – Up to $10,000
- Qualified higher education expenses
- Disability
- Health Insurance premiums – only while you are unemployed.
Q – Which type of IRA should I set up – a Roth or Traditional?
A – That depends on the client. Generally, the younger you are, the lower the tax bracket you are in, so a Roth IRA might make more sense. It has more time to grow tax-free before distributions are taken. If you are in a higher tax bracket, a traditional IRA might make more sense, if you qualify.
Q – Can I still contribute to an IRA if I’m in a retirement plan at work?
A – Yes, you can contribute to a Roth or Traditional IRA even if you participate in a retirement plan at work. However, there are income limits. You can contribute the maximum amount to a Roth or tax-deductible IRAs for 2018 if you are married filing jointly and have modified adjusted gross income less than $101,000. If you exceed this income limit, talk to your financial advisor about a non-deductible IRA and Roth conversion as options.
Q – If my spouse doesn’t have earned income, can she still make a traditional IRA contribution?
A – If you file a joint tax return, a nonworking spouse can contribute to a deductible IRA if the working spouse has income that exceeds the combined total of both spouses’ contributions.
If you have more questions, we can help with the answers. Call Hovis & Associates to schedule an appointment.