More Than A Name

More Than A Name

Audio Version: Let Me Hear It!

You may be surprised to learn that “Ira” is not one of the most popular baby names in 2015. Yeah… we weren’t either. But, these three little letters, when capitalized, should become much more attractive to you and your future: IRA.  

What Is An IRA? An IRA is an Individual Retirement Account that allows you to save for retirement and receive tax advantages. As long as you’re under the age of 70.5 and you or your spouse earned income this year, you can save to an IRA. There are two types of IRAs and the major tax perk of both is tax-deferral. Unlike a regular investment account, there will be no income tax liability on the earnings generated by the investments in an IRA, which means your savings can compound faster.

What Are The Types of IRAs? The two types of IRAs are Traditional and Roth. While the tax-deferral feature is the same for both, contributions and withdrawals are treated differently. 

Traditional IRA – if eligible, you may receive an income tax deduction for contributions. The tradeoff for this up-front tax deduction is that distributions, including earnings, will be taxed as ordinary income. Unfortunately, you won’t be able to kick the tax can down the road forever. The IRS requires minimum distributions be taken each year, beginning at age 70.5.

Roth IRA – if you are eligible to contribute to a Roth IRA, you will not receive an income tax deduction for contributions. The upside is that contributions can be withdrawn tax-free at any time and distributions of earnings may also be tax-free. In order to take tax-free distributions of earnings, you must be at least 59.5 and your initial contribution must have been made at least 5 years priork to the date of the distribution. There are no minimum distribution requirements at age 70.5 (can, kicked!)

How Much Can I Contribute? The maximum IRA contribution limit for 2015 is $5,500 ($6,500 if age 50+).  Your total IRA contributions for the year – to Traditional, Roth or a combination of both – cannot exceed these limits. Also, contributions cannot exceed your income for the year (for example, a college students with $4k in wages may only make a $4k contribution). 

What’s All This “if you are eligible” Talk? Although you may always contribute to a Traditional IRA – provided you’re under age 70.5 and you or your spouse earned income in the year – you may not receive a tax deduction for the full contribution amount. Also, your income may affect your eligibility to contribute to a Roth IRA all together. So, before rushing off to open or contribute to an IRA, catch next week’s $ense for the full scoop on eligibility and deductibility.