Whether you are preparing your income taxes yourself or you have hired someone to do them for you, you will most likely be seeing the question asking if you contributed to an IRA or ROTH IRA for the previous tax year. By the way, you have until April 15th to make that contribution for the previous year-just make sure it is reported in your filing!
- Tax Deferred—you get a tax break on the money you contribute. You will pay tax on all distributions. If you withdraw before age 59.5, there is a 10% penalty on top of the taxes unless you qualify for an exception.
- Tax-Deductible Eligibility—If you and your spouse are not covered by a retirement plan at work, then your contributions are tax deductible. If one or both of you are covered by a work retirement plan, then there are further income tests to determine if the contribution will be tax deductible.
- Contribution Limits—For 2020 and 2021, the higher of your Earned Income or $6000 ($7000 if age 50+).
- Required Minimum Distributions—you are required to start taking money out of your IRA’s every year starting at age 72. The government gave you a tax break all of these years, now they need some revenue.
- After tax contributions—you contribute after tax money. As long as the ROTH IRA has been open for 5 years and you are 59.5, then your distributions are TAX FREE.
- Contribution Limits—the same for IRA’s above ($6K, $7K for age 50+).
- Contribution Eligibility—there are income limits to be able to contribute to a ROTH IRA
- No Required Minimum Distributions while the owner is alive, however, a beneficiary will be required to take minimum distributions but no tax will be due.
Let’s say you aren’t eligible to contribute to an IRA or a ROTH IRA, but you really like the idea of this ROTH IRA—because who doesn’t like TAX FREE MONEY?! If you have an IRA account you can do what is called a ROTH Conversion. A ROTH Conversion is the process of converting your IRA account to a ROTH and paying the taxes now. There are some other things to consider when doing this, so you should consult a professional.
Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.