Individual retirement accounts, are investment vehicles that allow you to save for your retirement while also reducing your tax liability each year through deductible contributions. If you are not covered by another retirement plan, an IRA can represent an easy way of building retirement savings over the long term, while also saving you money in the present day.
Types of Individual Retirement Accounts
There are several types of IRAs that you can open, its type determines the amount that you can legally contribute in any period of time. You may open a traditional IRA if you are not covered by any other retirement plan, such as a 401k or other employer-sponsored plan. Your filing status may also determine whether you are eligible for any breaks with this account type.
Other IRA types include SIMPLE-- Savings Incentive Match Plan for Employees -- IRAs and SEP -- Simplified Employee Pension -- IRAs, which are employer plans administered and managed by your employer, instead of by you or by a financial institution. You can also open an education IRA to save for authorized education expenses. Lastly, you can open a Roth IRA if your adjusted gross income is below a certain threshold.
IRS Contribution Limits for Tax-Free IRAs
In a traditional IRA, individual account holders can contribute up to $2,000 per year. Joint account holders can contribute up to a total of $4,000 per year. Your contributions are fully deductible if your income is under $55,000 per year for single or head-of-household filers, or under $89,000 for a married couple filing jointly. Partial deductions will apply for incomes under $65,000 for single or head-of-household filers and $109,000 for a married couple filing jointly. In an education IRA, the account holder can contribute a maximum of $500 per year.
SEP IRA holders may contribute up to 15 percent of their salary each year. SIMPLE IRA holders may contribute up to $6,500 per year from their salary into their IRA. The funds held in these accounts grow tax-free. However, if any funds are withdrawn prior to you turning 59 1/2, you will be subject to early withdrawal penalties along with taxes due on the accrued funds.
Roth IRA Contributions
Contributions to Roth IRAs are handled differently from other IRAs. With a Roth IRA, contributions are not tax-deductible, but the earnings accumulate and can be withdrawn after just five years without tax liability -- after age 59 1/2. You are eligible to contribute to a Roth IRA if your AGI is under $95,000 as a single or head-of-household filer, or under $150,000 as a married couple filing jointly. Because the contributions are not tax-deductible, there is no maximum contribution amount for a Roth IRA.
Dates and Deadlines
For each filing year, you have until the tax filing deadline of April 15 to make any IRA contributions. If April 15 falls on a weekend, you would have until the following Monday, as that would be the tax deadline.
If you are making a contribution between January 1 and the tax filing deadline (i.e. after December 31 of the tax year) you would need to note with your financial institution that the contribution is for the previous tax year, and not the current tax year. Otherwise, the contribution would default to the current year, and you would not see any benefit in the taxes filed for the previous tax year.