What Everyone Should Know About IRAs

US News

Make the most of your IRA.

Individual retirement accounts hold more money than any other type of retirement account. How well you select investments and minimize taxes within your IRA will play a big role in how prepared you are for retirement. Here are 10 things you should know about your IRA.

Higher contribution limits for older savers

Most workers can contribute up to $5,500 to an IRA in 2014, but investors age 50 and older can contribute an extra $1,000 to these tax-advantaged accounts. The annual contribution limits are adjusted each year to keep up with inflation.

Later contribution deadline than 401(k)s

While you generally must make contributions to workplace retirement accounts by Dec. 31, you have until the date you file your taxes to make IRA deposits. If you make an IRA contribution between Jan. 1 and your tax deadline, remember to specify which year the contribution is for.

Delay or prepay your taxes.

Traditional IRAs allow you to defer paying taxes on your contributions, but income tax will be due on your savings and the growth when you withdraw the money. Roth IRA contributions are made with after-tax dollars, and withdrawals in retirement from accounts that are at least five years old, including the earnings, are tax-free. Investing in both types of accounts can add tax diversification to your portfolio.

Income limits for tax breaks

If you have a retirement account at work, the tax deduction for traditional IRA contributions is phased out for savers who have modified adjusted gross incomes between $60,000 and $70,000 in 2014 ($96,000 and $116,000 for couples). For people who are married to someone with a workplace retirement account, the tax deduction is phased out if the couple's income is between $181,000 and $191,000.

Roth IRA income cutoffs

Workers are eligible to make Roth IRA contributions until their income reaches between $114,000 and $129,000 for singles and heads of household and $181,000 to $191,000 for married couples. However, people who earn more may still be able to convert traditional IRA assets to a Roth.

Withdrawals are required.

Traditional IRA distributions become required after age 70½. Those who fail to withdraw the correct amount must pay a 50 percent excise tax on the amount not distributed as required. Your first IRA distribution is due by April 1 of the year after you reach age 70½, but subsequent distributions are required by Dec. 31.

Older age for retirement withdrawals

Workers who leave their jobs at age 55 or later (or age 50 for public safety employees) can take penalty-free 401(k) withdrawals at age 55. If retirees roll that money into an IRA, they will have to wait until age 59½ to avoid the penalty.

Penalty-free early withdrawals allowed

IRA withdrawals before age 59½ generally trigger a 10 percent early withdrawal penalty, but you can avoid that if you use the money to pay for large unreimbursed medical expenses, health insurance after a layoff, higher education costs, a first home purchase up to $10,000 ($20,000 for couples) or set up annuity payments from the IRA over your life expectancy.

You are responsible for choosing appropriate investments.

While 401(k)s generally have a limited menu of funds, IRAs offer a much wider selection of investment options. It is up to the individual account owner to select a diversified range of appropriate investments and control the fees and other investment costs they pay.

Tax credit for low-income savers

Workers who earn less than $30,000 for individuals, $45,000 for heads of household and $60,000 for couples and save for retirement in an IRA are eligible to claim the saver's credit. This tax credit for retirement savers can be worth as much as $1,000 for individuals and $2,000 for couples, but most people who claim it get between $100 and $200.

More From US News & World Report
View Comments (5)