You’re nowhere near retirement—or maybe you’re closer than you’d like to admit—and the last thing you want to think about is stashing your hard-earned dollars in a retirement account, not to be seen until years or decades later. But if you want your golden years to actually be golden, it’s time to consider saving for retirement. One of the most common ways to do that is with an IRA, but let’s face it, understanding IRAs and how they affect your taxes is confusing.
Let’s talk about the two most common: the Traditional IRA and the Roth IRA.
Traditional IRAs
When you contribute to a traditional IRA, you can take a deduction in the year that you contribute, essentially getting a tax break now. You’ll pay taxes on that money and taxes on any gains on that money when you withdraw it. The benefit of the traditional IRA is that you will presumably be in a lower tax bracket when you are retired and withdrawing the money.
To contribute to a traditional IRA, you must have taxable income in the year that you want to contribute, and you can contribute to this type of IRA even if you are covered by a separate employee plan.
Traditional IRA Contribution Limits
There are contribution limits that change every year. The limit is up to your current compensation or the maximum limit set by the IRS.
- In 2024, that limit is $7,000.
- If you are over the age of 50, that limit in 2024 is $8,000.
Traditional IRA Income Thresholds
Be aware that there are income thresholds for being able to deduct your contributions.
The amount that can be deducted from your income decreases as your income increases. For 2024, those thresholds are:
- For Married Filing Jointly: $123,000 to $143,000
- For Single or Head of Household: $77,000 to $87,000
- For Married Filing Separately: $0 to $10,000
You can contribute to a traditional IRA if you are over these thresholds, you just won’t get the deduction.
Traditional IRA Penalties
If you withdraw money from your traditional IRA account before the age of 59 ½, you may owe a 10% tax penalty in addition to paying taxes at your regular tax rate.
Roth IRAs
When you contribute to a Roth IRA, you do not get any deductions or a tax break in the year that you make the contribution. Instead, you will be able to withdraw that money tax-free after the age of 59 ½.
Roth IRA Contribution Limits
Like a traditional IRA, yearly contribution limits do exist for Roth IRAs, and you cannot max out both a traditional IRA and a Roth IRA. The contribution limit is a combined limit.
- In 2024, that limit is $7,000.
- If you are over the age of 50, that limit in 2024 is $8,000.
Roth IRA Income Thresholds
The income thresholds for a Roth IRA affect whether or not you can contribute to a Roth IRA. If you earn more income than the following amounts, you will not be able to contribute to a Roth IRA and will have to choose a traditional IRA. For 2024, those maximums are:
- For Married Filing Jointly: $230,000 to $240,000
- For Single or Head of Household: $146,000 to $161,000
- For Married Filing Separately: $0 to $10,000
Roth IRA Penalties
Because Roth IRA contributions are considered after-tax contributions, you can withdraw those contributions at any time. However, if you withdraw the earnings on those contributions before the age of 59 ½, you may be subject to a 10% penalty.
Are There Other Types of IRAs
Yes, there are other types of IRAs, but these are primarily for those who run small businesses or are self-employed (and require a whole other blog post).
The time to start saving for retirement is now, no matter what your age. Deciding whether you should choose a traditional or a Roth IRA depends on your income and your current situation.
Not sure which option is right for you? We’re here to help. Contact one of our tax preparers to discuss your married filing status options.
Please note that tax laws change often, and we recommend that you to reach out to one of our tax preparers for the most up to date information.