With a few weeks to go before Tax Day, we often get phone calls with questions about Roth IRAs and Traditional IRAs. Read more to learn the answers to many frequently asked questions by our clients.
Every spring we hear from clients asking questions about IRA accounts. IRS rules vary depending upon type of the account – Roth or Traditional. Here, we’ve outlined some of the most common questions and answers for you.
Q – What’s the deadline for making an IRA contribution?
A – For both Roth and Traditional IRAs, clients have until April 15th to make contributions for the prior tax year. So, to make a 2018 contribution, you need to do so before April 15, 2019.
Q – What is the difference between a Roth and Traditional IRA?
A – A Roth IRA is a tax-advantaged account that grows TAX-FREE, because the money invested in the account is money that has already been taxed. When you take a withdrawal, you will not be taxed on any qualified distributions received. A Traditional IRA is a tax-advantaged account that grows TAX-DEFERRED, because you can deduct these contributions from your income taxes in the year you make the contribution. When you take a withdrawal in retirement, that amount is considered to be taxable income.
Q – How much can I contribute to my IRA?
A – The 2018 contribution limit for both Traditional and Roth IRA is $5,500. If you are over 50 years old, you can contribute an additional $1,000, for a total contribution of $6,500.
The 2019 contribution limit was raised to $6,000. If you are 50 years or older, the same $1,000 catch-up contribution applies for a total limit of $7,000.
Q – How can I avoid the 10% early withdrawal penalty?
A – The easiest way to avoid the early withdrawal penalty is to wait until you are age 59 ½ to take any money out of the account. However, the IRS does allow some exceptions to this rule.
- First time home buyer – Up to $10,000
- Qualified higher education expenses
- Disability
- Health Insurance premiums – only while you are unemployed.
Q – Which type of IRA should I set up – a Roth or Traditional?
A – That depends on the client. Generally, the younger you are, the lower the tax bracket you are in, so a Roth IRA might make more sense. It has more time to grow tax-free before distributions are taken. If you are in a higher tax bracket, a traditional IRA might make more sense, if you qualify.
Q – Can I still contribute to an IRA if I’m in a retirement plan at work?
A – Yes, you can contribute to a Roth or Traditional IRA even if you participate in a retirement plan at work. However, there are income limits. You can contribute the maximum amount to a Roth or tax-deductible IRAs for 2018 if you are married filing jointly and have modified adjusted gross income less than $101,000. If you exceed this income limit, talk to your financial advisor about a non-deductible IRA and Roth conversion as options.
Q – If my spouse doesn’t have earned income, can she still make a traditional IRA contribution?
A – If you file a joint tax return, a nonworking spouse can contribute to a deductible IRA if the working spouse has income that exceeds the combined total of both spouses’ contributions.
If you have more questions, we can help with the answers. Call Hovis & Associates to schedule an appointment.