A Contributory Individual Retirement Account (IRA) is a great way to save for your retirement. Yet in order to maximize the value of your IRA, it's important to stay on top of current changes to the way these accounts are managed. This includes recent changes that go into effect in 2018 affecting income eligibility. (There is another type of IRA you may be familiar with—the Rollover IRA—which you fund by transferring money from a company plan (i.e., 401k) of a former employer.)
To help you better understand IRAs and these most recent changes, let's take a closer look at what you need to know.
What is an IRA?
An IRA is a retirement account that can be set up at a financial institution, such as a bank, brokerage or credit union. After you open an IRA, you normally make regular contributions to the account -- money that's invested into the CDs, stocks, mutual funds and other investments contained within the account. These contributions are tax-advantaged, which is the primary benefit of having an IRA.
You should be aware that Contributory IRAs come in two forms: traditional and Roth. Here's a short overview of the key differences:
- You must have earned income to contribute.
- You must be younger than 70-and-one-half years old to contribute to a traditional IRA. Roth IRAs have no age limits.
- Traditional IRAs do not have income eligibility restrictions, but Roth IRAs do. Single income filers must have gross income of less than $135,000 in 2018; married couples less than $199,000.
- Both offer significant tax breaks, but they differ on how. Traditional IRAs are tax deductible the year you contribute; Roth IRAs do not have tax deductible contributions, but offer tax breaks on earnings and withdrawals. So with traditional IRAs you get the tax breaks when you're working, and with Roth IRAs the tax breaks generally come once you're retired.
Contributory IRA rules for 2017 and changes for 2018
The contribution deadline for IRA plans in 2017 is April, 17, 2018. The annual contribution limit for both traditional and Roth IRAs is $5,500 in 2017. Investors who are older than 50 may make an additional "catch-up" contribution of another $1,000 in 2017, raising their total to $6,500.
In the coming year, there are some significant changes of which to be aware, including the income ranges for IRA deduction. For single taxpayers with a 401k or similar workplace retirement plan, the deduction is phased out for those making $63,000 to $73,000 -- a slight increase from last year's $62,000 to $72,000.
Married couples who file jointly and have their IRA contribution covered by an employer retirement plan will also see a slight increase. The deduction phase-out range jumps from $101,000 to $121,000 -- another slight jump over the prior year's $99,000 to $119,000 range.
Finally, couples who have an individual contributor who is not covered by a plan (but have a spouse who is), will see their income phase-out range rise from $189,000 to $199,000, an increase from last year's range of $186,000 to $196,000.
Whether you choose a traditional or a Roth, a contributory IRA is a great vehicle for retirement savings, but it's important to stay on top of annual adjustments. While contribution limits are unchanged in 2018, income ranges have.
Please contact KeyPoint for assistance with any of your retirement account needs.