Are You Maxing Out Your IRA in 2018?

by John Cooney on Sep 10, 2018

Roth IRA, IRA, retirement, Taxes

In 2018, the contribution limit for both a traditional IRA and a Roth IRA is $5,500 per year.  If you are over 50 years old, you are allowed an additional $1,000 “catch-up” contribution.  It is important to remember, that this amount is NOT per account, it is the total for all of the IRAs and Roth IRAs you contribute to.  It is also a per person limit, so a married couple could each contribute up to the $5,500 limit in a year.  There are two important restrictions that the IRS places on who is eligible to contribute to an IRA.  The first, is that the individual must have earned income in the year of the contribution that is equal to or greater than the amount contributed to the IRA.  So, for example, if you have $4,000 of earned income for 2018, you can not contribute more than $4,000 to your IRAs.  Not everything counts as earned income.  This link brings you to the IRS chart of what is and is not earned income.   There is only one exception to the earned income rule and that is for married couples who file a joint tax return.  If one of the spouses does not have any earned income, or earned income below $5,500, that individual could still contribute to a traditional or Roth IRA as long as their spouse has enough earned income to cover the first individual’s contribution as well as any contribution the spouse makes themselves.  For example, if John and Jane are married, and John has no earned income for the year, but Jane has $30,000 in earned income, then they both would be able to contribute the full $5,500 since Jane’s earned income, $30,000, is greater than the contribution amount of $11,000.

                The second restriction the IRS has is based on the gross income that the individual makes during the year.  For Roth IRAs in 2018, the ability to contribute begins to phase-out when an individual’s modified adjusted gross income (MAGI) hits $120,000 and is completely phased out once MAGI hits $135,000.  For couples who file a joint return, the phase-out limit begins at $189,000 and ends at $199,000.  If you are over these amounts, then you can not contribute to a Roth IRA.  If you are in between these amounts, the amount you can contribute will be limited based on where your MAGI falls.  For traditional IRAs, the rules are a little more complicated.  If your filing status is single and your employer does not offer any qualified retirement plan, then you can always contribute to a traditional IRA.  However, if your filing status is single and you are covered by an employer retirement plan, your MAGI phaseout starts at $63,000 and ends at $73,000.  IF you are married, file a joint return, and neither spouse is covered by a qualified retirement plan at work, then both spouses can contribute the maximum to a traditional IRA, regardless of income levels.  If you are married, file a joint return AND both of the filers are covered by an employer retirement plan, your phase-out begins at $101,000 and ends at $121,000.  If only one spouse is covered by a retirement plan, that spouse is subject to the same limit ($101,000 - $121,000).  For the spouse not covered by the employer plan, their limit is a little higher.  The un-covered spouse’s phase-out begins at $189,000 and ends at $199,000.

                What happens if your income is above the phase-out amounts?  The IRS still allows you to contribute to your traditional IRA, however, the contribution is what is referred to as a non-deductible contribution.  Essentially, it is almost a hybrid of the traditional and the Roth.  Like a Roth contribution, a non-deductible contribution can not be deducted from your income when calculating your taxable income for the year.  Also like a Roth, qualified withdrawals of non-deductible contributions are tax-free.  However, like a traditional contribution, the growth or earnings from the contribution are subject to income tax when they are withdrawn.  To ensure you are not taxed twice on the contribution, when you file your income taxes for the year you made a non-deductible contribution, you will also need to file a Form 8606 and keep a copy of the form for yourself as well.  This form helps establish that the contribution was non-deductible and has already been subject to income taxes.  This will be very valuable to you when withdrawals from the IRA are made.

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