A 401(k) isn't the only way to save for retirement—Individual Retirement Accounts (IRAs) can provide you with another savings vehicle regardless of whether your job offers a 401(k). Traditional IRAs allow you to contribute funds pre-tax, reducing your taxable income, while post-tax Roth IRA contributions can grow tax-free.[1]
What should you know about IRA eligibility requirements, and how much can you contribute each year?
Who can contribute to an IRA?
As long as either you or your spouse earns some taxable income each year, you can contribute to a traditional IRA (up to your total amount of earned income). This allows stay-at-home spouses to save for retirement on their own; as long as their spouse earns an income, both the working spouse and the stay-at-home spouse can contribute to an IRA.[2]
However, depending on your income level and whether you have access to a 401(k) through work, you may not be able to deduct all your contributions—and without the tax deduction a traditional IRA provides, it may not make as much sense to contribute to one.[3]
· If you don't have access to a 401(k) through work, you're eligible to deduct the full amount of your traditional IRA contribution—regardless of how much you earned.[4]
· If you do have access to a 401(k) through work, you can deduct the full amount of your traditional IRA contribution if your modified adjusted gross income (MAGI) is $66,000 or less (for single filers) or $105,000 or less (for married couples filing jointly). After a filer exceeds these income thresholds, they may not be able to deduct the full amount of their contribution.[5]
Roth IRAs have similar (albeit different) income restrictions and phase-outs. Those who are single or file taxes as head of household (HOH) can contribute to a Roth IRA in 2021 as long as their MAGI is less than earn $125,000 per year. The taxpayer's Roth eligibility will then begin to phase out until they hit a MAGI of $140,000. Married taxpayers filing jointly can contribute the full amount to a Roth as long as their MAGI is under $198,000, with contributions fully phasing out when they hit $208,000.[6]
How much can you contribute to an IRA?
In 2021, those who are age 49 and younger can contribute up to $6,000 per year to a traditional or Roth IRA, while those age 50 and older can contribute up to $7,000 per year. These limits may be gradually reduced as the taxpayer reaches or exceeds the income limits detailed above.[7]
One of the main differences between a traditional IRA and a Roth IRA (other than the tax treatment of withdrawals and gains) is that as long as you have some earned income, you can contribute to a Roth IRA after you've turned 70 ½.[8] For traditional IRAs, once you turn 70, you can no longer contribute—even if you're still working and earning an income.[9]
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. 1
2
[1] https://www.schwab.com/ira/understand-iras/roth-vs-trad-ira [2] https://www.investopedia.com/terms/s/spousal-ira.asp [3] https://www.irs.gov/retirement-plans/ira-deduction-limits [4] https://www.kiplinger.com/retirement/retirement-plans/traditional-ira/602192/traditional-ira-contribution-limits-for-2021 [5] https://www.irs.gov/retirement-plans/2021-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work [6] https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2021 [7] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits [8] https://www.irs.gov/retirement-plans/roth-iras [9] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
Sources
https://www.schwab.com/ira/understand-iras/roth-vs-trad-ira
https://www.investopedia.com/terms/s/spousal-ira.asp
https://www.irs.gov/retirement-plans/ira-deduction-limits
https://www.irs.gov/retirement-plans/2021-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work https://www.irs.gov/retirement-plans/roth-iras
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