5 things you may not know about IRAs
Have you started to save for retirement? Do you know if you are on track or not?
Tax time is a great opportunity to review your situation and figure out what you need to do. One of the most popular ways to save for retirement is using an IRA, or individual retirement account. There are lots of options, but two that are often used are traditional and Roth IRAs.
Here are five things you may now know about IRAs:
1. It may not be too late to fund your IRA or ROTH-IRA for 2020. You can contribute up until the tax filing deadline of May 17th if you have not already filed your taxes.
2. If you have enough earned income you may be able to contribute to your spouse’s IRA or Roth IRA even if they have no earned income. Consult your tax advisor and financial professional for the specifics on these rules.
3. There is no income contribution limit on contributions to a pre-tax IRA if you and your spouse did not have access to an employer plan in 2020. If your spouse did but you did not, there are higher limits so you may still be able to make this happen.
4. You can still contribute to an IRA if you have enough earned income even if you are in the top tax bracket, you just can’t take the deduction.
5. There are no income limits on converting from an IRA to a Roth IRA. When combined with the above information in fact #4 this can allow individuals in certain situations that may not be able to contribute directly to a Roth IRA due to income to contribute to an IRA and then convert. There are issues that can arise on this if you have other IRA money or even SIMPLE-Ira or SEP-IRA money so consult your financial professional and tax advisor to make sure you do this correctly.
Qualified distributions from a Roth IRA are income tax-free. To be qualified, the Roth IRA holder must have met the five-year holding period AND the distribution must be due to the Roth IRA holder’s death, disability, first-time homebuyer, or upon attaining age 59½ or will be subject to a 10% penalty in addition to income tax.
Investors’ anticipated tax bracket in retirement will determine whether or not a Roth account versus a traditional retirement account will provide more money in retirement. Generally, investors who are in a higher tax bracket at retirement relative to their current tax bracket while making contributions to a Roth account benefit more than an investor who is in a lower tax bracket at retirement.