Have you contributed to an IRA yet for 2014? If not, did you know that you still may be able to contribute to one of these accounts up until April 15th?
This blog post is by far my most technical writing to-date and will help you to determine if you are eligible to contribute to a tax advantaged IRA for 2014. Although this is not an exhaustive list of the characteristics of IRAs, I hope that it will also help you to understand the differences between Traditional IRAs and Roth IRAs.
Who Can Contribute?
Traditional IRA – Anyone under age 70 ½ who has earned income for the year.
Roth IRA – Anyone who has earned income for the year and a Modified Adjusted Gross Income (MAGI) less than $129,000 in 2014 if filing single and $191,000 if filing jointly. For 2015 these limits increase to $131,000 and $193,000.
How Much Can Be Contributed?
Traditional IRA – A maximum of $5,500, not to exceed annual earned income. If 50 or older the max is $6,500.
Roth IRA – The same as the traditional IRA, but reduced for a single filer with a MAGI greater than $114,000 in 2014 or $181,000 for a joint filer. These numbers increase to $116,000 and $183,000 in 2015.
Can a Non Working Spouse Contribute?
Traditional IRA – Yes, as long as the total contribution to the account does not exceed the total annual income between the two spouses. Follow the guidelines below to find out if the contribution is deductible.
Roth IRA – Yes, as long as the total contribution to the account does not exceed the total annual income between the two spouses and MAGI does not exceed the limits described above.
What Are the Tax Benefits For Making a Contribution?
Traditional IRA – Contributions are fully tax deductible if a single filer is covered under a retirement plan at work and their MAGI is $60,000 or less in 2014 or $96,000 or less if married filing jointly. Contributions are still partially deductible if a single filer has a MAGI less than $70,000 or if a joint filer has a MAGI less than $116,000. If someone is not covered by a retirement plan at work but their spouse is, then their contributions are fully deductible if their MAGI is less than $181,000 in 2014 and partially deductible if their MAGI is less than $191,000. All six of the income limits described in this section are slightly higher for 2015. Finally if a single filer is not covered by a retirement plan at work or neither joint filer is covered by a retirement plan at work, then all contributions are fully deductible no matter what their income.
Roth IRA – None. There are no tax deductions or other benefits when funds are contributed to a Roth IRA.
When Can Funds Be Withdrawn?
Traditional IRA – Other than exceptions such as purchasing a first home, education, or financial hardship; penalty free withdrawals are not allowed until age 59 ½. After age 59 ½ there are no restrictions on withdrawals.
Roth IRA – Unlike Traditional IRAs, contributions can be withdrawn at any time penalty free. Earnings can be withdrawn penalty free when the account owner is 59 ½ and the initial contribution is at least five years old.
When Must Funds Be Withdrawn?
Traditional IRA – Beginning at age 70 ½ a percentage of the account value must be withdrawn based on the owner’s life expectancy.
Roth IRA – Withdrawals are never required.
How Are Withdrawals Taxed?
Traditional IRA – All withdrawals are taxed as ordinary income.
Roth IRA – Qualified withdrawals are never taxed.
Can You Please Summarize All of This For Me?
Congratulations, you made it through all of the technical information! To summarize, if you are single and earned less than $121,000 in 2014 or are married and earned less than $191,000, you are still eligible to make a contribution to an IRA for 2014 if you have not already. If by chance you have an excessive amount of money sitting in the bank, don't miss out on this opportunity!
Whether it is better to save into a Traditional IRA or Roth IRA depends on your individual situation. If it’s not clear to you which option is better, I’d be happy to help you determine the best choice for you based on your unique financial situation.
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