As we get close to Tax Day, we want to remind clients that it’s not too late to make a contribution to a Roth or Traditional IRA for 2019. Every spring we hear from clients asking questions about IRA accounts. IRS rules vary depending upon the type of 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 2019 contribution, you need to do so before April 15, 2020.

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 taxable income in the year you make the contribution. When you take a withdrawal in retirement from a Traditional IRA, that amount is considered taxable income based on your tax rate at that time.

Q – How much can I contribute to my IRA?
A – The 2019 contribution limit for both Traditional and Roth IRA is $6,000. If you are over 50 years old, you can contribute an additional $1,000, for a total contribution of $7,000. The same contribution limits will apply in 2020.

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. If you are married filing jointly and have modified adjusted gross income (MAGI) of $103,000 or less, you can contribute the maximum amount to either a Roth or tax-deductible IRA for 2019. If you exceed this household income limit, talk to your financial advisor about a non-deductible IRA and a Roth conversion as an option.

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 total combined contribution amounts into the IRAs.

If you are covered by a retirement plan at work, there are income limits if your spouse wants to make a contribution. For married couples filing jointly, the MAGI limit is $193,000.

If you have more questions, we are here to help. Call Hovis & Associates to schedule an appointment at (800) 411-0737.