David K. Hovis

IRA Contribution FAQs

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.

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