Retirement accounts can be confusing with all of the associated rules, regulations, and restrictions. Opening one for the first time might be a little intimidating. If you’ve had one for years, you may have forgotten when you’re supposed to take distributions or how much more you can deposit with catch-up contributions. When it comes to retirement accounts, knowledge is wealth. That’s why we’ve listed below answers to the top five questions people ask about IRAs to help you make the best decisions with your assets.
- What is the difference between a traditional and Roth IRA? There are several differences between these two types of accounts, but the main difference is income qualification. Anyone can contribute to a traditional IRA, although they may not qualify for the yearly tax break if their income is too high.
Deductibility for Traditional IRAs. There are some limitations and requirements in order to receive this deduction. Depending on your modified adjusted gross income (MAGI), the contributions you make to a traditional IRA may be tax deductible.
- Individuals who are not covered by a workplace retirement plan are eligible for full tax deductibility of their contributions, regardless of their MAGI.
- For single individuals who are covered by a plan at work for 2021, IRA contributions are fully deductible for a MAGI of up to $66,000 (with a gradual deductibility phase out between $66,000 and $76,000).
- For married couples filing jointly, where the contributing spouse is covered by a workplace plan, full deductibility is available for a MAGI of $105,000 (with a deductibility phase out between $105,000 and $125,000).
Note that these figures only relate to the deductibility of contributions, not eligibility for contributions. In general, any individual with earned income can contribute to a traditional IRA in an amount not exceeding that earned income. In contrast, being able to make contributions to a Roth IRA (which are not deductible) will depend on your MAGI.
Roth IRA Eligibility. In 2021, there is also still eligibility limits for individuals to make contributions to a Roth IRA. Single taxpayers with a MAGI of $125,000 can make a full contribution, and those with a MAGI between $125,000 and $140,000 can make a lesser contribution. Married taxpayers can make full contributions where their MAGI is $181,000 (and lesser contributions for a MAGI between $198,000 and $208,000).
Further differences between these two accounts are explained in answers below.
- How much can I contribute to an IRA? For the 2021 year, contribution limits for both traditional and Roth IRAs are set at $6,000 annually. If you are older than 50, however, you are eligible to contribute an additional $1,000 annually in catch-up contributions. If you have two accounts, your combined contributions cannot total more than $6,000 (or $7,000 if older than 50).
- What is the deadline for making a contribution? Contributions can be made up until the tax deadline. You do have to specify which tax year you want your contribution to count for, though, if you do end up making a contribution after December 31st.
- When can I take distributions? For a traditional IRA, you are allowed to take your first penalty-free distribution at age 59 ½. At age 72, you must take your first distribution, and one every year after that. Your required minimum distribution (RMD) amount is based on your life expectancy and how much money you have in the account. For a Roth IRA, you can take a penalty-free distribution after the account has been open for five years or you have turned 59 ½, whichever comes first. If you are younger than 59 ½, however, you can only distribute up to the total contribution amount, but not on any earnings the account has made.
There are two exceptions to the above rules: If you are a non-spouse of an inherited IRA, you may be required to take distributions right away; and if you are using the money from an IRA to make a first-time home purchase, pay for college, or another qualifying reason, you may take a penalty-free distribution.
- Can I have both a 401k and an IRA? Yes, you can have and contribute to both a 401k account and an IRA. These types of accounts have different annual contribution limits, qualifications, and fees, so it’s important to educate yourself on both to determine where you want to put your money. Most financial advisors would recommend contributing at least the maximum match limit your employer offers with your 401k before contributing to another account in order to take advantage of free retirement money.