Let’s talk about traditional IRAs.
A traditional IRA is an Individual Retirement Account (IRA) funded with pre-tax or tax-deductible dollars. These dollars reduce (tax-deductible) the amount of income declared on your tax return.
Example: I am married, my combined household income will be $100,000 in 2018. If my wife and I contribute $5,500 each to our traditional IRA, that will reduce our household income by $11,000 (5,500+5,500), and we would then report and pay taxes on an income of $89,000 (100,000-11,000) instead of $100,000. The benefit of an IRA is to reduce your current tax bill. Then investing those dollars until they used for income in retirement (59.5+) is key. If you invest your first 5,500 at 25, let it grow to 65 using an 8% rate of return, that first $5,500 should grow to nearly $120,000. Imagine if you did that every year?
The Rules:
You must have earned income greater than or equal to the amount of the IRA contribution, or your spouse with earned income (spousal benefit).
Individuals can contribute up to $5,500 if they are under 50 years old and $6,500 if they are 50+ years old.
If you or your spouse has an employer sponsored plan like a 401K or 403B, your income determines how much of your contribution is deductible from your income.
These limits do not apply for transferring other retirement accounts, like a 401K to an IRA (401K Rollover)
The tax reform act changed IRA/Roth recharacterization rules.
Always consult your Financial Advisor or CPA/Accountant before making decisions related to IRAs.
If you have any questions or would like to learn more about IRAs, please call 913-681-9155 or email taylor@engageadvisors.com.
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