There are many IRA strategies and products that can be used to fund your IRA. Here is an overview.
A traditional IRA allows your retirement savings to grow tax deferred, meaning you won’t pay taxes on previously untaxed contributions and earnings until you withdraw your money. The allowable contribution limit for 2017 and 2018 is $5,500. Individuals age 50 or over may make an additional allowable contribution of $1,000 per year (2017 and 2018 contribution would be $6,500). For subsequent years, contribution limits will be indexed to inflation.
IRA contributions under age 70½: With earned income may contribute up to the allowable limit annually (or 100% of earned income, whichever is less) to a traditional IRA.
IRA contributions after age 70½: You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.
For many investors, those contributions may also be tax deductible depending on the amount of the investor’s income.
If a married couple files a joint tax return, each spouse may contribute up to the annual allowable limit.
Access to Your Money When You Need It
Once you're ready to take withdrawals from your IRA, you will pay income tax on any earnings you've accrued and deductible contributions you've made. If you are under age 59 1/2 when you withdraw IRA assets, you will also be subject to a 10% penalty unless you meet certain conditions.
Penalty-free withdrawals under age 59 1/2 are available under the following condition:
- your disability (as defined by the Internal Revenue Code)
Rollovers and Transfers
You can transfer money from one existing Traditional IRA to another or from an employer-sponsored retirement plan to a Traditional IRA without tax liability. Consolidating assets in one IRA can offer a number of benefits, including reduced administration costs and a more cohesive investment strategy for your retirement. In addition, IRAs typically offer a much broader range of investment choices than employer-sponsored retirement plans, as well as greater flexibility in designating beneficiaries.
Rollovers by Non-Spouse Beneficiaries
A non-spouse beneficiary may rollover a deceased participant's eligible retirement plan amounts into an inherited IRA. The transfer must be a direct trustee-to-trustee transfer, directly from the plan administrator to the IRA. Prior to 2007, only a spouse beneficiary could rollover retirement plan proceeds.
Mandatory Withdrawals and Tax Implications
When you reach age 70 1/2, you must begin taking distributions from your IRA each year, whether you want to or not. These required minimum distributions, as they're called, are based on your age, the age of your beneficiary and your year-end account balance. Failure to take the proper amount can result in severe tax penalties. However, most IRA custodians will help you determine how much you're required to withdraw each year.
Like other withdrawls from a Traditional IRA, required minimum distributions are subject to income tax on the portion that consists of investment earnings and deductible contributions.
If you find you cannot deduct your IRA contributions you may still contribute to a Traditional IRA. However, your initial contributions will be made on an after-tax basis and you must keep track of this after-tax amount using IRS form 8606. If you are in a situation where non-deductible contributions are your only option, you may want to consider another investment alternative.