An IRA or Individual Retirement Arrangement is a personal savings vehicle that’s available to just about everyone and offers great tax advantages.
These accounts are the cornerstone to retirement because just about everyone can have one. But they’re often misunderstood. So, I’ll review the basics, plus key IRA facts to know.
A traditional or regular IRA allows you to deduct some or all your contributions from your taxes. In other words, you don’t have to pay tax on money you send to a traditional IRA in the current year.
The tax on your contributions and earnings is deferred until you make withdrawals in the future. After you reach age 70½, you can’t make additional contributions and you must begin to take required minimum distributions.
A Roth IRA, is very different because your contributions are not tax-deductible. You must pay tax on the money you put in a Roth IRA. However, both contributions and earnings can be withdrawn completely tax free. Unlike a traditional IRA, there are no required distributions and you can even contribute to a Roth IRA after age 70½.
Free Resource: Retirement Account Comparison Chart (PDF download)
10 IRA Facts Everyone Should Know:
1. You must have earned income to contribute to an IRA.
If you have taxable compensation during the year-such as salaries, wages, tips, bonuses, commissions, and self-employment income-you’re eligible to contribute to an IRA. You can contribute an amount equal to your taxable compensation up to $6,000 (or $7,000 if you’re age 50 or older) in 2019.
2. Spouses without earned income can have an IRA.
If you’re married and file a joint tax return and one of you has compensation, each of you can have an IRA. This helps an unemployed or stay-at-home spouse save for retirement.
Also see: What Is a Spousal IRA?
3. Minors can have an IRA.
Anyone with earned income can contribute to an IRA, no matter your age. So children can start saving for retirement as soon as they get their first part-time job. They can contribute as much as they earn, up to the maximum limit of $6,000.
4. An IRA can’t be owned jointly.
All retirement accounts must be owned by individuals, even if you’re married.
5. You can’t pay for someone else’s IRA.
Each owner of a retirement account must qualify to open up and contribute to an IRA.
6. There’s no minimum IRA contribution requirement.
You choose whether you want to contribute to an IRA each year or not. If you don’t make a contribution the account remains open indefinitely.
7. You can have more than one IRA.
You can open up and contribute to as many traditional and Roth IRAs as you like. However, your total contributions to all of them can’t exceed your annual allowable limit (which is $6,000 for most people).
You can make any combination of contributions in the same year, such as $2,000 to a Roth IRA and $4,000 to a traditional IRA.
8. You can’t contribute to a Roth IRA if your income is too high.
The amount you can contribute to a Roth IRA is reduced when your modified adjusted gross income (MAGI) reaches certain limits. For 2019, single taxpayers can’t make Roth IRA contributions when their MAGI is $137,000 or more. And married people who file jointly, the income cutoff is $203,000.
Check out this IRS Roth IRA table to find out how much you can contribute.
9. Your Roth IRA can sit idle.
If you contributed to a Roth IRA in the past but now make too much money to be eligible, you can open up and contribute to a traditional IRA instead. If your income falls below the limit set by the IRS in the future, you can start making contributions to the same Roth IRA again.
10. Current IRA losses are not tax-deductible.
In a taxable brokerage account, investment losses can be used to offset investment gains each year–but that’s not the case for an IRA. However, a limited amount of IRA losses may be claimed if you liquidate the account and the total distributions are less than your basis in the account.
Where to Get a Traditional or Roth IRA?
When you’re ready to open up a traditional or Roth IRA, there are many great options. Choose a company that’s easy to use with diversified investment options. I use Betterment for a variety of retirement accounts and love their great service.