IRAs, a.k.a. Individual Retirement Account, allow you to make tax-deferred investments to provide financial security when you retire. Contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances, and generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed.
You can set up an IRA with a:
- bank or other financial institution
- life insurance company
- mutual fund
For 2019, your total contributions to all of your traditional IRA cannot be more than:
$6,000 ($7,000 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit. The IRA contribution limit does not apply to:
- Rollover Contributions
- Qualified Reservist Repayments
Your traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.
You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.
If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.
You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.
An excess IRA contribution occurs if you:
- Contribute more than the contribution limit.
- Make a regular IRA contribution to a traditional IRA at age 70½ or older.
- Make an improper rollover contribution to an IRA.
Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.
To avoid the excess contributions tax:
- withdraw the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
- withdraw any income earned on the excess contribution.
Traditional and Roth IRAs allow you to save money for retirement. This chart highlights some of their similarities and differences.
Investment advisory services offered through Allmerits Asset Management, LLC, a Registered Investment Adviser firm. Allmerits Asset Management does not provide legal or tax advice. Investment Adviser Representatives of Allmerits Asset Management may only conduct business with residents of the states and jurisdictions in which they are properly registered or exempt from registration requirements. Insurance and Annuity products are sold separately through Allmerits Financial and Insurance Service. Securities transactions for Allmerits Asset Management clients are through Trust Company of America, TD Ameritrade, Nationwide, John Hancock and American Funds.