With people living longer, the need to save more for retirement has never been greater. An individual retirement account may be the perfect tool to help you save for the golden years.
This column will deal with a traditional IRA. You can establish an IRA and fund it at any time from Jan. 1 of the current year and up to and including the date an individual’s income tax is due (generally, April 15 of the following year).
Deductions for an IRA can be taken before you actually contribute into your IRA. You can file your taxes in January and use your refund to fund your IRA. If desired, refunds of federal income taxes may be directly deposited into an IRA.
A traditional IRA allows you to contribute money into an account and reduce your income by the amount of your contribution. The money will grow tax-deferred until you take it out. When you take it out, you will owe tax on the entire amount taken.
There are two types of IRAs permitted: individual retirement accounts opened with a bank or a brokerage firm, and individual retirement annuities issued by an insurance company.
In 2019 and 2020, a wage earner may contribute the lesser of $6,000 or 100% of his or her wages for the year. If the wage earner is married, an additional $6,000 may be contributed on behalf of a lesser earning (or nonworking) spouse, using a spousal IRA.
This means the family unit may contribute up to a total of $12,000, as long as family compensation is at least that amount. If an IRA owner is 50 or older, he or she may contribute an additional $1,000 ($2,000 if the spouse also is 50 or older).
Taxpayers who participate in an employer’s plan may make fully deductible IRA contributions only if their modified adjusted gross income (MAGI) is below $103,000 if married and filing jointly; $64,000 if single; and $0 if married filing separately.
If MAGI exceeds these amounts, the $12,000 family or $6,000 individual maximum is reduced by a formula that eventually permits no deduction. You should consult your tax adviser if you plan to make a contribution into your IRA, but are concerned about these limits.
When taking money from your IRA, remember that any distribution before age 59 ½ is subject to an additional 10% penalty (plus being subject to current income tax). That is the case unless an exception applies. Examples of exceptions are – but not limited to – deductible medical expenses, qualified higher-education expenses and first-time home buyer expenses of up to $10,000.
There are typically three distribution plans for an IRA. Single-sum distribution becomes part of taxable income for that year. Life expectancy distribution requires a participant to calculate payout based upon his or her attained-age life expectancy, using life expectancy tables issued by the federal government.
Individual life annuities participants may elect income for life (and the life of a joint annuitant, usually a spouse, if desired).
If you originally opened your IRA with a bank or brokerage firm and now would like to have the guaranteed life income of an annuity, you can roll over your IRA into an individual life annuity.
All IRA participants are required to take Required Minimum Distributions at a certain age. Before passing the Secure Act last year, that age was 70 ½. Beginning in 2020, that age was changed to 72. This gives individuals an extra 16 months to accumulate more money for retirement.
The SECURE Act also enables an individual to contribute to an IRA past age 70 ½ if that person has earned income. If you are currently taking RMDs, continue to do so. The new law does not affect you.
Before starting an IRA, taking withdrawals from an IRA or taking deductions for an IRA, always consult your tax professional.
Bob Hollick is a State Farm Insurance agent based in Washington.
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