Between now and April 15th, millions of taxpayers can make a 2024 or 2025 IRA contribution. With the tax deadline approaching for 2024 contributions, understanding the nuances of Traditional and Roth IRAs can potentially lead to tax savings.
Traditional IRAs
Traditional IRAs provide a tax-advantaged way to save for retirement. For 2024 and 2025, the annual contribution limit is $7,000, with an additional $1,000 catch-up contribution allowed for individuals aged 50 and above.
One key benefit of Traditional IRAs is the potential for tax-deductible contributions. This means the amount you contribute can be deducted from your taxable income, potentially leading to a lower tax bill. However, the deductibility of contributions depends on factors such as your income and whether you or your spouse are covered by a retirement plan at work.
Your Traditional IRA grows tax-deferred, meaning you won't pay taxes on any investment earnings until you withdraw the money. Once you reach age 59 ½ you can take distributions from the account penalty-free. You will pay ordinary income tax on the amount of your withdrawals.
Finally, you must take Required Minimum Distributions (RMDs) starting at age 73. These RMDs are calculated based on your life expectancy and the balance in your account. It's important to note that RMD age increases occasionally. The next expected increase is to age 75 in 2033.
Roth IRAs
Roth IRAs offer a different set of tax advantages. While contributions are not tax-deductible, qualified withdrawals in retirement are tax-free. This can be particularly beneficial if you anticipate being in a higher tax bracket in retirement. The contribution limits for Roth IRAs are the same as for Traditional IRAs. However, there are income limitations to contributing to a Roth IRA.
The income limitations are determined by your modified adjusted gross income (MAGI) and differ depending on your filing status. For example, if you are filing married filing jointly in 2025, you cannot contribute the full maximum contribution if your MAGI is over $236,000. Be sure you familiarize yourself with these limitations.
Roth IRAs offer more flexibility than Traditional IRAs when it comes to withdrawals. You can withdraw your contributions at any time without penalty or taxes. You can withdraw your earnings from a Roth IRA without penalty after age 59 ½. Additionally, Roth IRAs do not have RMDs, giving you more control over your retirement income.
Lesser-Known Facts about IRAs
Spousal Contributions: Even if your spouse doesn't have earned income, he/she can still contribute to an IRA if you file your taxes jointly and you have earned income.
No Joint Ownership: IRAs cannot be jointly owned. Each individual must have their own separate account.
IRAs for Minors: You can open a Custodial IRA for a minor child or grandchild as long as they have earned income. This is a great way to introduce them to the benefits of long-term savings. Roth IRAs are a great option for minors because of the tax-free growth they can experience over a long time horizon.
Contributing to Someone Else's IRA: You can contribute to another person's IRA, if they have earned income. However, be aware of gift tax rules.
Multiple IRAs: You can have more than one IRA. This can be helpful for managing different investment strategies or beneficiary designations.
No Minimum Contribution: Many financial institutions allow you to open an IRA with a small amount of money and make additional contributions gradually.
Different Names, Same Account: Traditional IRA, Contributory IRA, and Rollover IRA are all essentially the same type of account for tax purposes.
Summary
IRAs offer valuable tax advantages and can be crucial to your retirement planning. However, the rules and regulations can be complex. If you have questions or need help determining which type of IRA is right for you, consult a qualified financial advisor or tax professional. They can provide personalized guidance and help you make informed decisions about your retirement savings.
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The material has been gathered from sources believed to be reliable, however Bedel Financial Consulting, Inc. cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide investment, tax or legal advice, and nothing contained in these materials should be taken as such. Investment Advisory services are offered through Bedel Financial Consulting, Inc. Advisory services are only offered where Bedel Financial Consulting, Inc. and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.
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