Retirement Planning: IRAs for a Tax-Advantaged Future

With the ever-changing rules surrounding traditional and Roth IRAs, it's essential to stay up to date. The recent enactment of the Secure 2.0 law in late 2022 brought even more changes, making IRAs even more beneficial for taxpayers. The one constant, however, is that IRAs can help you build a tax-favored nest egg for your retirement. Let's take a closer look at the fundamental rules and some of the recent updates.

Traditional IRA Rules

If you (and your spouse) aren't active participants in employer-sponsored retirement plans, or if you (or your spouse) are active participants and your modified adjusted gross income (MAGI) falls within certain annual limits based on your filing status, you can make an annual deductible contribution to a traditional IRA.

For instance, in 2024, if you file a joint return and are covered by an employer plan, your deductible IRA contribution gradually decreases from $123,000 to $143,000 of MAGI ($77,000 to $87,000 for singles).

Deductible IRA contributions provide a current tax reduction, and earnings grow tax-deferred. However, when you withdraw funds, they are taxable in full (with a 10% penalty if taken before age 59½, unless specific exceptions apply). Under the SECURE 2.0 law, you must start making minimum withdrawals by April 1 of the year following the year you turn 73 (previously 72 before 2023 and 70½ before 2020).

You can also make an annual nondeductible contribution to an IRA without considering employer plan coverage or your MAGI. The earnings in a nondeductible IRA are tax-deferred but taxable upon distribution (with a 10% penalty if taken early, unless exceptions apply).

Nondeductible contributions are tax-free upon withdrawal. If you've made both deductible and nondeductible IRA contributions, a portion of each distribution is considered nontaxable IRA contributions (the remaining portion is taxable).

Maximize Your Savings Potential

The maximum annual IRA contribution, whether deductible, nondeductible, or a combination, is $7,000 for 2024 (increased from $6,500 in 2023). If you're 50 years or older, you can make an additional $1,000 "catch-up contribution" for 2024 (unchanged from 2023). Additionally, your contribution cannot exceed your compensable income for the year.

Roth IRA Rules

If your income falls within specific limits based on your filing status, you can make an annual contribution to a Roth IRA. For example, in 2024, if you file a joint return, the maximum annual Roth IRA contribution gradually phases out between $230,000 and $240,000 of MAGI ($146,000 to $161,000 for singles). You can contribute up to the amount allowed for a traditional IRA, reduced by any contributions made to non-Roth IRAs for the year (excluding contributions to a SEP or SIMPLE plan).

While Roth IRA contributions are not deductible, earnings grow tax-deferred, and withdrawals are tax-free if the following conditions are met:

• Five years have passed since your first contribution to a Roth IRA
• You have reached age 59½, or in the case of death, disability, or first-time home-buyer expenses for yourself, your spouse, child, grandchild, or ancestor (up to a $10,000 lifetime limit).

Additionally, there are no required minimum distributions from a Roth IRA. You can convert a traditional IRA to a Roth IRA regardless of your income, treating the amount transferred as a regular withdrawal for tax purposes (without the 10% early withdrawal penalty).

No Age Limit for Contributions

Whether it's a traditional or Roth IRA, there is currently no age limit for making regular contributions. As long as you have compensation income, you can continue to contribute to your retirement savings. Reach out to us if you have any questions about IRAs.