Fun Facts about Funding Your IRA

IRA Types and Eligibility Regulations

As part of our financial planning services, we often get questions about whether to make contributions to a Traditional IRA, Roth IRA, etc.

First, be sure you have taken advantage of the payroll deferment options available through your employer – 401(k), 403(b), 457, etc.  This is especially important if your employer will provide a “matching amount” in addition to your tax-deferred contributions.  Also, don’t forget the deferral opportunity available in your Health Savings Account (HSA).

For many taxpayers, if you are covered by an employer-provided retirement plan, there are several restrictions on your ability to make additional Traditional (deductible) IRA and Roth contributions.  If you aren't eligible to participate in an employer's retirement plan, and your spouse (if married) isn't either, it doesn't matter how much you earn.  You can deduct your entire Traditional IRA contribution.  But, if you or your spouse participates in an employer's retirement plan, such as a 401(k), 403(b), 457, etc., or pension plan, your ability to take a deduction is income-restricted.

If you participate in an employer's plan, listed below are the adjusted gross income (AGI) limitations for the Traditional IRA deduction in 2018.  You can find your Adjusted Gross Income on Line 7 of page 2 of the new Form 1040.

If you are Married Filing Jointly, your ability to make a Traditional (deductible) $5,500 IRA contribution begins to “phase out” once your Adjusted Gross Income exceeds $101,000 for 2018, and it becomes $0 once your AGI exceeds $121,000.

If you do not participate in an employer's plan, your Traditional IRA deduction is limited only if your spouse participates in their employer's retirement plan.  In this case, the income limits are:

Now, if that isn’t confusing enough, what about contributing to a Roth IRA? The income limits for the Roth are more generous, but there are limits.  Again, if you are Married Filing Jointly, your ability to even make a Roth contribution begins to “phase out” at $189,000 AGI.

For those whose AGI impacts their ability to utilize a Traditional or Roth IRA, a “Backdoor Roth” may be a good planning option for high-income households.  The process allows them to max-out a Roth IRA, despite being above the income limitations for a Traditional IRA or an allowable ROTH contribution.  A Backdoor Roth is a conversion of IRA assets to a Roth IRA. Currently, anyone can convert money that they have put into an IRA (both non-deductible and Traditional) to a Roth IRA, no matter how much income they earn. What’s more, they can also roll as much money as they want from an existing Traditional IRA into a Roth IRA. There are no income limitations for making non-deductible IRA contributions, and every individual is eligible to do one Roth IRA conversion a year.

You can make a Backdoor Roth IRA contribution in one of two ways.  First, if you are eligible to contribute money to an existing Traditional IRA, wait a short period, and then roll over the money to a Roth IRA account.  Or, you can convert an entire Traditional IRA account to a Roth IRA account.  Your Traditional IRA doesn’t have to be new.  You can roll over existing Traditional IRA money—or an old Traditional IRA account—into a Roth.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA.  The converted amount is generally subject to income taxation.  It’s another way you can plan for your future and your income needs for retirement.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  Strategies mentioned may not be suitable for all investors.