Note: Some data in this article has been updated
The Individual Retirement Account, or IRA, is in my opinion, one of the most versatile tax/savings tools available in the planning arsenal. After years of being stuck at a $2,000 limit, Congress finally found the wisdom to keep up with cost of living adjustments and raise the limits eventually to $5,500 per year ($6,500 for you lucky 50+ people).
How Does the IRA Work?
How does it work? One can contribute up to the limit ($5K/6K) or any amount less on an annual basis (up to the tax filing deadline of April 15 for the year ending prior) which could grow on a tax-deferred basis until withdrawal (tax deferral means no taxes on earnings/profits in the account before withdrawal). Furthermore, depending on whether or not a qualified retirement plan was available to you at work (e.g. 401(k)) and depending on your income level, this investment could be fully tax-deductible. But you have no plan available at work, the IRA contribution will be fully tax-deductible. And you have a retirement plan at work, then it will be tax deductible if you earn under a certain amount.
The versatility of this plan comes in special provisions available to IRA’s that are not available to other types of accounts such as:
- Withdraw money for a first time home purchase ($10,000 limit)
- Use money for qualified education expenses
- ability to use stretch provisions (section 72t) to potentially tap IRA money well before the typical age 59 ½ minimum withdrawal age
- The ability to access deceased spouse’s IRA assets if you inherit the IRA and they were over age 59 1/2 and you were not.
Kids and IRAs – They’re Alright
These are just some of many flexible features of this “retirement account.” Another useful fact that some people may not know – even children who are legally working can contribute to an IRA (though a Roth may make more sense depending on earnings level). If your child earns $5,500, and spends all the money, you can still contribute $5,500 for them. Provided they earn the $5,500, they are eligible to contribute up to $5,500 or their yearly earnings. Whichever is lower. But there’s no rule that says the $5k has to come from their bank account!
Who should consider an IRA? Anyone who:
- doesnt like overpaying taxes
- has earned income
- hopes to retire in dignity
- wants to save for retirement but needs flexibility for college expenses or home purchase
- wants to invest in retirement options outside of their 401(k) options
There are many more points to consider in utilizing IRA’s and we haven’t even scratched the surface here. If you’d like the full, left-brain book of rules and regulations for IRA’s, then there is no better source than the IRS’ own Publication 590. If you’d like more color on IRA’s, consider reading the following:
Would you and Chris’ team be a good fit to work together to optimize your finances? We think you’d be better off if you did. Fill out our pre-screening questionnaire by clicking here. Once you do we will work on a time to talk. Thank you!
CIRCULAR 230 DISCLOSURE: To comply with U.S. Treasury Department regulations, please be informed that, unless otherwise expressly indicated, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing or recommending to another party any transaction, arrangement, or other matter. See disclosures HERE.