Note: There is a newer version of this article available at Funding Your Retirement Accounts in 2016 with information available for the 2016 calendar year.
April 15 is just around the corner. That’s the last day that you can contribute to an IRA for 2014. There are three different types of IRA and this article is designed to differentiate between the different types, and to discuss the requirements for investing in them. We will look at the three types of IRA in the order of their appearance on the retirement investing scene.
First on the scene (in the 1970s) was what is today referred to as a traditional deductible IRA. To contribute to a traditional deductible IRA, you must have earned income and be under the age of 70 ½. In a traditional deductible IRA:
- Contributions are from pre-tax dollars
- The money in the IRA grows tax deferred
- When the money is withdrawn, all of it is taxed as ordinary income
- There is a 10% early withdrawal penalty for any money you take out before the age of 59 ½
- There is a 50% penalty for failing to take a MRD each year once you reach the age of 70 ½
BUT WAIT! You cannot deduct IRA contributions if your income is over certain levels and you belong to a retirement plan through your employer (as all federal employees do).
If your filing status is single you can fully fund a traditional deductible IRA if your income is below $60,000; you may partially fund it if your income is between $60,000 and $70,000; you may not fund it at all if your income is over $70,000. The numbers for 2015 IRAs are $61,000 and $71,000.
If your filing status is joint and your spouse also belongs to a retirement plan at work you can fully fund a traditional deductible IRA if your income is below $96,000; you may partially fund it if your income is between $96,000 and $116,000; you may not fund it at all if your income is over $116,000. The numbers for 2015 are $98,000 and $118,000.
If your filing status is joint and your spouse does not belong to a retirement plan at work you can fully fund a traditional deductible IRA for your spouse if your income is below $181,000; you may partially fund it if your income is between $181,000 and $191,000; you may not fund it at all if your income is over $191,000. The numbers for 2015 are $183,000 and $193,000. You will still be governed by the limits in the preceding paragraph as you belong to a retirement plan.
In 1986 the traditional non-deductible IRA appeared. To contribute to a traditional non-deductible IRA, you must have earned income and be under the age of 70 ½. In a traditional non-deductible IRA:
- Contributions are from after-tax dollars
- The money in the IRA grows tax deferred
- When the money is withdrawn, the earnings are taxed as ordinary income
- There is a 10% early withdrawal penalty for any money you take out before the age of 59 ½
- There is a 50% penalty for failing to take a MRD each year once you reach the age of 70 ½
There are no income limits on contributing to a traditional non-deductible IRA.
The mid-90s brought us the Roth IRA. It has several differences from the traditional IRAs that may be to your advantage if you meet the income restrictions. To contribute to a Roth IRA you must have earned income, but can be of any age. In a Roth IRA
- Contributions are from after-tax dollars
- The money in the IRA grows tax-free in most circumstances
- If when the money is withdrawn, the account has been open for at least five years and you are at least age 59 ½ the earnings are tax-free
- There is a 10% early withdrawal penalty for any earnings you take out before the age of 59 ½
- You are never required to take a MRD
BUT WAIT! There are income restrictions on contributing to a Roth IRA.
If your filing status is single you can fully fund a Roth IRA if your income is below $114,000; you may partially fund it if your income is between $114,000 and $129,000; you may not fund it if your income is over $129,000. For 2015 the numbers are $116,000 and $131,000.
If your filing status is joint you can fully fund a Roth IRA if your income is below $181,000; you may partially fund it if your income is between $183,000 and $191,000; you may not fund it if your income is over $191,000. For 2015 the numbers are $183,000 and $193,00.
You are allowed to convert a traditional IRA to a Roth IRA regardless of your income level.
The income restrictions listed for traditional deductible and Roth IRAs are for 2015. IRS Publication 590-A has the rules on contributing to IRAs.
You are allowed to contribute $5,500 to an IRA and an additional $1,000 beginning in the year you turn 50. These contribution limits are the same for both 2014 and 2015. You can contribute to an IRA even if you are fully funding your Thrift Savings Plan.
