The IRA Investor’s Checklist

There’s so much discussion about IRA contributions, especially during tax season. As simple as an IRA is on the surface, they come with rules that can quickly complicate retirement savings. The complications become particularly acute when it comes to deducting IRA contributions. For that reason, we put together an IRA investors checklist for the 2015 income tax filing season.

IRA Investor Checklist landscape

If you’re considering making an IRA contribution, it’s important to evaluate the following considerations:

Did/Do You Participate in Any Other Retirement Plans?

If you want to make a deductible IRA contribution, you must first determine if you have participated in any other retirement plans, such as an employer sponsored 401(k) plan. This could have a material effect on your IRA income limits (see below).

Most people immediately know the answer to this question, but it can get complicated – especially if you worked only a short time for an employer during the year who had a plan that you contributed to, but spent the rest of the year in a job with no plan. This can be easily forgotten if the job covered only, say, the first two weeks of January 2015, and you are only now contemplating making an IRA contribution for the year.

If you’re not sure if you were covered by an employer retirement plan any time during the year, look at your W2, paying attention to Box 13. If you were covered by a plan, the “retirement plan” box will be checked.

Check Your Income

Both deductible and Roth IRA contributions have limits based on your income. There are however different limits for each type. Furthermore, for deductible IRA contributions, the limits can vary depending on marital and filing status and whether you or your spouse of a workplace retirement plan such as a 401k.

If neither you nor your spouse are covered by a retirement plan at work, there are no income limits to make a tax-deductible contribution to a traditional IRA. There are limits, however, if either you or your spouse are covered by a plan at work or if you want to make a Roth IRA contribution.

(Note: All income numbers below are based on modified adjusted gross income, or MAGI.)

Deductible IRA income limits for 2015:

If you ARE covered by a retirement plan at work:

⦁ Married filing jointly: Up to $98,000 -100%; $98,000 to $118,000 – partial; over $118,000 – zero
⦁ Married filing separately: Up to $10,000 – partial; over $10,000 – zero
⦁ Single or head of household: Up to $61,000 – 100%; $61,000 up to $71,000 – partial; over $71,000 – zero

If you are NOT covered by a retirement plan at work, but your spouse is, the limits for 2015 look like this:

⦁ Married filing jointly: Up to $183,000 – 100%; $183,000 to $193,000 – partial; over $193,000 – zero
⦁ Married filing separately: Up to $10,000 – partial; over $10,000 – zero

These are the income limits for tax deductible IRA contributions; you can still make non-deductible contributions to a traditional IRA even if your income exceeds the limits.

Roth IRA income limits:

You can make a Roth IRA contribution even if you are covered by a retirement plan at work.

Roth IRA income limits for 2015 are:

⦁ Married filing jointly: Up to $183,000 – 100%; $183,000 to $193,000 – partial; over $193,000 – zero
⦁ Married filing separately (but lived with your spouse): Up to $10,000 – partial; over $10,000 – zero
⦁ Single, head of household, or married filing separately (but did not live with your spouse during the year): Up to $116,000 – 100%; $116,000 up to $131,000 – partial; over $131,000 – zero

Important consideration with Roth IRA income limits – Unlike traditional IRAs, when you reach the income limits for Roth IRAs, you are not allowed to make a contribution to the plan at all.

Don’t Exceed the Contribution Limit

IRA Investor ChecklistThe annual contribution limits for an IRA – whether traditional or Roth – are $5,500, or $6,500 if you are age 50 or older. That means that if you’re married, you and your spouse may contribute a combined $11,000, or $13,000 if you’re both age 50 or older.

Contributions are limited by the amount of earned income. That is to say that you cannot make a contribution that exceeds your earned income. If your earned income is $4,000, your maximum IRA contribution is $4,000. Unearned income, like rental income or investment income, doesn’t count toward the contribution threshold.

Be careful not to exceed those contribution limits as there are stiff penalties if you do.

Traditional or Roth IRA?

Under various circumstances, and even in different years, you may decide to fund either a traditional or a Roth IRA. You can contribute to both accounts – as long as you are eligible based on your income – but your total contribution to both plans cannot exceed $5,500 (or $6,500 if you’re 50 or older).

The investment earnings are tax-deferred on both the traditional and Roth IRAs, but there are two significant differences between the two plans:

⦁ Traditional IRA contributions are generally (up to the above noted income limits) tax-deductible in the year they are made, while IRA contributions are never tax-deductible.
⦁ Traditional IRA funds are generally taxable upon withdrawal (except for the portion that is comprised of non-deductible contributions); Roth IRA withdrawals are tax-free as long as you are at least 59 1/2 years old, and have participated in the plan for a minimum of five years.

You might favor making a traditional IRA contribution if you are in a high tax bracket, and the amount of the contribution will be deductible based on your income level. If however you don’t qualify for the tax deduction for a traditional IRA contribution, you will almost certainly be better off contributing to a Roth IRA. Since there is no deduction to contribute to either, the Roth wins because you get a big tax break on the backend.

Notice that the income limits for a Roth IRA are substantially higher than what they are for the traditional IRA for someone covered by an employer plan.

On the other hand, if you have reasonable belief that your income tax bracket will be much lower in retirement than what it is now, you may want to favor making a traditional IRA contribution. This is because the contribution will not only give you a needed tax deduction right now, but also because your income will be subject to only minimal taxation upon withdrawal.

It’s a tough call to make and probably one that’s better made when you’re just a few years away from retirement when you’re in a better position to assess your post retirement tax situation.

Make Sure the Account is With a Low Cost Broker

In order to get the best possible return on your investments in your IRA, you should have the funds deposited with a low cost broker. Check out our post Best Brokers for IRA Retirement Accounts in 2016 to find some of the best low cost IRA brokers available.

Have the Custodian Walk You Through the Process

If you already have an existing IRA account, you’re probably familiar with how the contribution process works. If not, contact your IRA custodian (broker) and have them walk you through the process. There may be certain paperwork that you will need to complete, as well as a specific way that you will have to send payment.

Don’t skimp on this step! I once sent in an IRA contribution that was mistakenly credited to my regular brokerage account (I had both an IRA account and a regular brokerage account with the same firm). I didn’t discover the error until after I filed my income taxes, including the IRA deduction. I had to amend my return, since there is no way to reclassify an IRA contribution once your return is filed.

Evaluate each of these IRA investor’s checklist items individually, and see how they fit into your own tax situation.

Topics: Investing

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