The traditional IRA is really the old timer of the IRA group. It’s still a very popular tax-advantaged savings vehicle for retirement. You may be able to contribute up to $6,000 ($7,000 if age 50 or older) for 2020, if you are eligible.
With a traditional IRA, you make contributions which may be tax-deductible. I say ‘may’ because you might be in a situation where contributions to your traditional IRA are not tax deductible. More details on that below. Your contributions grow tax-deferred until you make a withdrawal – a distribution. Your distribution is taxed at ordinary income tax rates provided you are age 59 1/2 or older. If you are under age 59 1/2, your distribution may be subject to a 10% penalty in addition to ordinary income tax. This penalty can be avoided if the distribution is for qualified education expenses, first-time home purchase (up to $10,000), or unreimbursed medical expenses in excess of 7.5% of your adjusted gross income (AGI) if you are under age 65.
What are those tax-deductible limits mentioned above? Well, this depends on whether you or your spouse is covered by a retirement plan through your employer and your income level.
If you are married filing jointly and YOU are covered by a retirement plan, you can take a full deduction up to $124,000 modified adjusted gross income (MAGI). Between $104,000 and $124,000 MAGI a partial deduction. Over $124,000 MAGI, no deduction.
If you are married filing jointly and YOUR spouse is covered by a retirement plan, you can take a full deduction up to $196,000 MAGI. Between $196,000 and $206,000 MAGI a partial deduction. Over $206,000 MAGI, no deduction. If neither you, nor your spouse, is covered by a retirement plan, you can deduct the full contribution.
Single and covered by a retirement plan? You can take a full deduction up to $65,000 MAGI. Between $65,000 and $75,000 MAGI a partial deduction. Over $75,000 MAGI, no deduction. If you are not covered by an employer retirement plan, you can deduct the full contribution.
Married filing separately? Not a good situation financially. You can take a partial deduction if your MAGI is less than $10,000 and you get no deduction if your MAGI is $10,000 or more.
You have to take a required minimum distribution (RMD) at age 72 if you were born on or after July 1, 1949, otherwise your RMD age is 70 1/2. You can still make contributions to your traditional IRA as long as you are still working.
These are just the highlights of the traditional IRA. This IRA is good for those who believe they will be in a lower tax bracket in retirement, and who are able to fall within the income range of being able to take a tax deduction for their contributions. It’s also good for those who do not have access to, or are not eligible to contribute to, a retirement plan through their employer.
IRA rules can be confusing at best, and you may need to consider other account types, goals, investment accounts, and your timeline. Before investing in any type of account, or engaging in an investment strategy, be sure to consult your adviser. Keep in mind that all investing involves risk, and you should always seek help if you are not sure about what you are doing. As an independent Certified Financial Planner™, I can help you. No matter where you are in life, a CFP® professional can help you create a financial plan for today and tomorrow. #LetsMakeAPlan #CFPPro #talktometuesday #Hireaplanner #RothIRA #fees #IRA #SEPIRA #SIMPLEIRA