Ultimately, what makes or breaks a decision on what type of an IRA is right for you is taxes. To get the most out of what you’re contributing to your IRA, it’s important to understand what these benefits mean, the limitations placed on them, and what that means to you.
IRAs are a powerful tool that can help you build wealth, and prepare for your retirement, and also some extra advantages at tax season. Most people are a little perplexed on what those advantages are, so let’s dive right in and get those questions answered.
Through a traditional IRA, your contributions may be fully, or partially tax deductible, depending on your circumstances, and generally, the amount in your traditional IRA (including earnings and gains) are not taxed until you retire.
Contributions & Taxes
According to IRS.gov, for 2014 and 2015, your total contributions to all of your traditional and Roth IRAs cannot be more than:
- $5,500 ($6,500 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:
See the charts below to find if you’re eligible for tax deductions.
This chart is for those that ARE covered by their retirement plan at work:
This chart is for those that are NOT covered by their retirement plan at work:
With Roth IRAs, savers get a tax-free stream of income in retirement. And it’s not just the contributions that come out tax-free. Uncle Sam doesn’t lay a finger on any of the earnings. It can be a pretty sweet deal when you’re talking about decades of compounding.
The only catch is that you pay income tax on your contributions up front when you make the contributions. Unlike the traditional IRA, which gives investors a tax deduction for the year the contribution is made, the Roth version lets savers contribute after-tax money today and withdraw principal and earnings tax-free at retirement.
Contributions & Taxes
Roth IRAs are not tax-deductible, but the same general contribution limit applies to both Roth and traditional IRAs ($5,500 ($6,500 if you’re age 50 or older). However, your Roth IRA contribution might be limited based on your filing status and income.
This table shows whether your contribution to a Roth IRA is affected by the amount of your modified adjusted gross income as computed for Roth IRA purpose:
It has to be noted that sometimes, a Roth plan and a traditional plan just won’t work for you. And when does that occur? Consider your employer’s 401k program. If you’re fortunate enough to receive a matching contribution in a 401k plan, it may make better financial sense to contribute the amount necessary to receive the maximum match, and then, only if you can still afford to make contributions, consider an IRA.