Some of the most common questions that clients ask me have to do with retirement accounts. While there are many options, today I want to send out a short lesson on the Traditional IRA. Here is a quick who, what and why to answer some of your questions.
What is a Traditional IRA?
IRA stands for Individual Retirement Account. A Traditional IRA is type of IRA that is not a Roth IRA or Simple IRA. Generally, the contributions made into a Traditional IRA are deductible, but it has its own rules on the contribution amounts and the deductibility of those contributions.
Who can set up a Traditional IRA?
Anyone who is under 70.5 and has taxable compensation during the year can contribute or open a traditional IRA. This is true whether or not they are covered by an employer’s retirement plan, like a 401k. However, being covered by an employer’s plan phases out the deductibility of the contributions.
How much can my spouse and I contribute into my Traditional IRA?
For 2015, an individual can contribute a maximum of $5,500 (or $6,500 if you are age 50 or older) for the year. So a couple can contribute up to $11,000 or if they are both over 50 years old the amount shoots up to $13,000. Remember, while you are limited by your taxable compensation, keep in mind that one spouse can cover for the other.
For example, Jack is over 50 and is unemployed but his wife Jill, who is under 50, earns $45,000 in wages (taxable compensation). In this case, Jill can contribute $5,500 and Jack is able to put away $6,500. Jill’s wages have covered for Jack.
Now if we change Jill’s income to $8000 and keep the other details the same, Jill would still be able to contribute $5,500 but Jack would only be allowed a $2,500 contribution.
Why would I want to contribute to an IRA?
Contributions to traditional IRA’s are deducted from your income therefore lowering your liability when you file your taxes. The deductibility of your contribution will be phased out subject to some rules. The rules consider if you have a retirement plan from your work, your modified adjusted gross income, and your filing status. If you are not covered by an employer’s retirement plan then you can fully deduct your contribution regardless of your modified adjusted gross income. Consult your tax professional if you are covered by a retirement plan and would like to make a deductible contribution.
When can I make the contribution?
You can make the contribution at any time during the year. However, if you make a contribution between January 1st and April 15th of the following year you must designate which year you would like it to be applied; prior or current year. This allows you the opportunity to reduce your tax while having your tax return prepared for the year.
I wanted to keep this short and sweet, but if you still have some questions please ask.
David Hilliard, EA NTPI Fellow is a Enrolled Agent and Fellow with the National Tax Practice Institute. He can be reached for questions at (714)921-2790 or at DHilliard@gtbsonline.com