A traditional IRA is one of the most conventional retirement plans that is available to everyone right now. The money that grows in these plans is tax-deferred and contributions can save up to $6,000 on your tax return for any tax year. It is important to remember that the deadline to open a current year traditional IRA is the tax filing deadline, so all 2015 IRA accounts would need to be opened by April 15, 2016 in order to count for filing purposes.
If you’re thinking about opening a traditional IRA or want to know how much you’ll be able to contribute to it, then here are all of the facts that you’re going to want to know today.
#1. Contributions for 2015 are going to total $5,500 for a majority of people. You don’t actually need to be employed to open an IRA, but you do need to have income from some source to contribute to it. You can also choose to rollover a 401k to an IRA in certain circumstances if you prefer. Total contributions are capped at $5,500 for 2015 for most contributors, but those who are aged 50 or above will be allowed a “catch-up” contribution of an extra $500. Although that doesn’t seem like much, that’s an extra $7,500 that can be invested by the age of 65 if you begin catch-up contributions at age 50.
#2. Traditional IRA contribution limits are also age restricted. Unlike Roth IRAs where someone can always contribute to them at any age, the contributions to a traditional IRA must stop by the age of 70.5. If you still want to invest into an IRA and want to convert a traditional IRA to a Roth IRA, you must be able to qualify to do so and make the request by the end of business on December 31 of that year. You will need to personally pay any taxes that are involved in the rollover because the money being distributed is going into another retirement plan.
#3. You can have contributions postmarked before the tax filing deadline and still have them count. As long as you’ve mailed a traditional IRA contribution to your account holder on April 15 and have received a postmark on the envelope reflecting this, the contribution will still count for the tax year being filed. If the postmark on the contribution is April 16, then it will count as a contribution for the next tax year.
#4. Consider using ACH contributions to speed up the process. If you have an online account holder for your traditional IRA, then consider setting up regular ACH contributions from your preferred checking or savings account. This will let you be able to budget a maximum contribution more easily without having to initiate every single transaction. Most ACH transactions become live in 2 business days or less once they’ve been initiated. If you request a contribution on April 15, then the policies of your account holder will dictate which tax year you’re allowed to claim for the contribution.
#5. There are no extensions for traditional IRA contributions. Unlike SEP IRA contributions and a few other retirement planning funding options, there are no extensions granted to make extra retirement contributions to a traditional IRA. If you are granted an extension to file your taxes, the contributions for the current tax year will still end on April 15. Anything made afterward will count as a contribution for the next year.
#6. Sometimes the IRA contribution limits do not apply. This is typically when you are creating a transfer or rollover so that you’re creating a new traditional IRA from an existing retirement product. If you are a qualified reservist, then there is no limit to the amount of repayments that can be made into the traditional IRA .
#7. There are no income limits to the traditional IRA. Unlike the Roth IRA, a traditional IRA does not have income restrictions on it. You can make the maximum level of contributions to this retirement plan at any income level. The only difference is that the tax deduction for making a contribution to a traditional IRA is phased out beginning at $61,000 of adjusted gross income for single workers or $98,000 for married workers filing jointly. This applies if workers are subject to a workplace retirement plan, such as a 401k. You do not have to contribute to your workplace retirement plan to be subjected to the tax deduction phase-out.
#8. Traditional IRAs can be part of an overall generational wealth plan. If you are contributing to a traditional IRA, then your heirs are going to have access to this money if you are unable to take distributions from it for whatever reason. Because the taxes on distributions are deferred until they are taken, contributors who are in a lower tax bracket at retirement then they were when working will save even more because the total burden will be reduced.
#9. Start taking distributions at age 59.5. You can begin to take distributions from your traditional IRA before the age of 60 without penalty. You will simply need to pay taxes on the amount that is withdrawn based on what your current tax bracket at that time happens to be. Because money grows without the hindrance of taxes, all of your investments can continue to compound each year without worry of capital gains taxes. If you do take an early distribution, however, there will be a 10% tax placed on top of the current tax rate that you fit into because of your income.
Knowing the traditional IRA contribution limits, both monetary and age-related, will help you be able to better plan for your retirement. The time to act is now. Whether you have 10 years or 30 years to plan for your retirement, the faster you begin making investments in a tax-deferred way with a traditional IRA, the more comfortable your upcoming retirement will be. Use this information, open up or rollover an account with it, and then let your money grow.