An IRA is a smart way to save for retirement.

Your income bracket is usually higher during your working years than it is when you retire. By making tax-deductible savings contributions while you're working, an IRA lets you maximize your retirement savings. You also save money by taking withdrawals in the future, at a lower taxable rate.

Tax advantages

Contributions may be deductible from your gross income on your federal income tax return for the year in which the contributions are made. Earnings grow on a tax-deferred basis. Deductible contributions and earnings are subject to federal income tax when withdrawn. (If you live in a lower-tax state when you withdraw contributions, you also save money on state income taxes.)

Eligibility requirements

You must not attain the age of 70 ½ during the year you contribute to a Traditional IRA. You must also have earned income (compensation) in order to contribute to a Traditional IRA.

Annual contribution limits

In tax years 2014 and 2015, you can make annual contributions to a Traditional IRA of up to $5,500 or 100% of your earned income, whichever is less. For individuals over the age of 50, a contribution of up to $6,500 is permitted. An aggregate of $11,000 can generally be contributed per married couple ($5,500 per IRA) provided that either you or your spouse has earned income of at least that amount. For married couples over the age of 50, you may make an aggregate contribution of $13,000 ($6,500 per iRA). All annual contribution limits apply to the combination of all of your Traditional and Roth IRAs.

If you are age 50 or older, you may make additional "catch-up" contributions to your IRA. Over the next several years, the maximum annual contribution amount could increase.        

Note: Additional "catch-up" contributions have been included in amounts shown for age 50 or older.

Distribution guidelines

You may take distributions from a Traditional IRA starting at age 59½ - distributions taken before then are subject to taxes and tax penalties, unless taken for a qualified exception. You may take distributions in specific amounts, as a lump sum, or as a series of systematic payments. Distributions are taxed at ordinary income tax rates for the year the distribution was made. You are required to start taking distributions from your IRA by April 1 of the year following the year in which you reach age 70½.

The amount of your annual contribution to a Traditional IRA that can be deducted from your federal income taxes is dependent on two factors. These factors are whether or not you or your spouse participate in an employer sponsored retirement plan and the amount of your adjusted gross income as determined on your federal income tax return. The following scenarios should help you determine whether or not your contributions are deductible:

  • If you (and your spouse) do not participate in an employer sponsored retirement plan, your contributions to a Traditional IRA are fully tax deductible, regardless of the amount of your adjusted gross income.
  • If you (and your spouse) participate in an employer sponsored retirement plan, your adjusted gross income level will determine how much of your contribution is tax deductible. The following table should help you determine the deductible amount:

 

Roth IRA

A Roth IRA is an Individual Retirement Account that provides tax-free growth. As a result, it's the simplest - and potentially the most effective - sheltered account imaginable.

The Roth Tax Advantage

Like a deductible IRA, Roth gives you the advantage of getting taxed only once, rather than twice (or more) as with a regularly-taxed investment account.

  • The Roth IRA is simple: it requires no special reporting to the IRS. (With a deductible IRA you have to report a deduction on your 1040 form when you make a contribution; on withdrawals you report the entire withdrawal amount as taxable income.)
  • Roth has an extra advantage if you think taxes will probably rise in the future, since you're paying now rather than later. (Of course that's a disadvantage if you think taxes will fall.)

Here is a summary of how it works:

Regularly-Taxed Account

You pay income tax, and then make your contribution with post-tax dollars

Your principal may be subject to taxes on dividends and capital gains as it grows

You pay capital gains tax on your gain at withdrawal

Deductible IRA

You get a tax deduction, essentially letting you deposit pre-tax dollars

Your principal grows tax-free

You pay income tax on the entire amount   of your withdrawal

Roth IRA

You pay income tax, and then make your contribution with post-tax dollars

Your principal grows tax-free

You pay no further taxes on withdrawal

Roth IRA contribution limits

IRAs were created to encourage people to save for their retirement, by offering them a significant tax break. They are intended for ordinary working people.

The rules for limits change every year. You can (and should) get the official rules from IRS Publication 590.

  1. If your status is Married Filing Separately you are effectively locked out due to an extremely restrictive limit. (The rationale: the government doesn't want to give you a tax break in case your spouse is high-income. The exception: if you and your spouse lived apart for the whole year, you get the same limits as a Single filer).
  2. If your status is anything else, then your contribution limit is (using 2014 and 2015 numbers):
    • $5,500 if your income is low enough (and $6,500 if you're 50 or older)
    • Zero (that is, you can't contribute at all) if your income is too high
    • A sliding scale somewhere in between, if your income is somewhere in between "low enough" and "too high"
  3. In case you have multiple IRAs, the limit is the total you are allowed to contribute to all of them.
  4. And in all cases, your total contributions can't be greater than your reported salary income.

Penalties

An IRA is intended to be a retirement account, and so penalties apply if you misuse it by withdrawing funds too early. As a rule, you should plan not to make any withdrawals until at least age 59½ or five years after you make your first contribution, whichever comes later.

All information contained herein is intended to act as a guide in giving you an estimated allowable contribution limit. Contact your tax advisor for further information.

  • Earns interest, at higher rates than most regional financial institutions.
  • Helps you save for retirement.
  • Contributions are tax deductible.
  • Earnings are tax-deferred until withdrawn.
  • Contribution limits of $5,500 per year, or $6,500 if over the age of 65.