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.
Only those below a certain income can contribute to a Roth IRA, as these accounts grow tax free, but you’re also not allowed to use your Roth contributions as a tax write-off ever. Currently, you can contribute the maximum amount if you make less than $117,000 as a single person and less than $184,000 as a married couple filing jointly. At these totals, the contribution limit starts to fade out as income grows; and a person is completely disqualified from contributing to a Roth if they earn more than $132,000 as a single person and $194,000 as a married couple filing jointly.
Further differences between these two accounts are explained in answers below.
- How much can I contribute to an IRA? For the 2017 year, contribution limits for both traditional and Roth IRAs are set at $5,500 annually. If you are older than 50 ½, 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 $5,500 (or $6,500 if older than 50 ½).
- What is the deadline for making a contribution? Contributions can be made up until the tax deadline, which is on or around April 15th depending on the year. 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 70 ½, 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.