INDIVIDUAL Retirement Accounts were first introduced in 1974 as a way for those without employer pension plans to save for retirement. Today, IRAs come in two flavors: traditional and Roth. With a traditional IRA, you may get an initial tax deduction, but withdrawals are taxed as ordinary income. With a Roth, there’s no upfront tax deduction, but all withdrawals in retirement can be tax-free.
In 2019 and 2020, you can contribute up to $6,000 to all IRAs combined, provided you have at least that much in earned income. (Investment income doesn’t count.) If you’re age 50 or older, you can make an additional catch-up contribution of $1,000, for a total of $7,000. You have until mid-April 2020 to make your 2019 contribution.
If you stash those dollars in a traditional IRA, you can always deduct your contribution if you aren’t covered by an employer’s retirement plan. What if you or your spouse has a retirement plan at work? You’ll need to check the income limits for 2019 and 2020.
To fund a Roth, it doesn’t matter whether you’re covered by a workplace retirement plan. Instead, all that matters is whether you meet the income thresholds for that tax year.
If you’re lucky enough to qualify for both a traditional and Roth IRA, you should weigh the choice carefully. What if you qualify for neither? You can always fund a nondeductible IRA. That may sound like a drab consolation prize—but it could open the door to a Roth conversion.
Finally, don’t forget about your spouse. Even if your husband or wife has no earned income, he or she may still qualify for a so-called spousal IRA.
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