Whether you have a Traditional IRA by itself or alongside your employer-sponsored 401(k), changes are coming in 2019 that you need to be aware of.
Before you learn about the new rules, make sure you understand what a Traditional IRA is and how these changes can impact your retirement savings.
An IRA is an investment account that you can set up to save money for retirement.
When you invest your money into an Individual Retirement Account (IRA), you have your choice between a few different account types. The most popular ones are Traditional and Roth IRAs.
The most significant differences between these two IRA types are the tax implications. Roth IRAs are taxed when you make contributions, while Traditional IRA contributions go in tax-deferred. There is no wrong choice for an IRA, but you should pick what works best for your financial situation.
Hereâ€™s how a Traditional IRA works:
The IRS increased the IRA contribution limits in 2019.
You can contribute to both a Traditional and a Roth IRA in the same year, but your contributions canâ€™t exceed these limits across the accounts.
The 2019 deduction rules are based on your filing status and adjusted gross income (AGI). How much you earn impacts directly how much of your Traditional IRA contributions you can deduct from your federal and state income taxes.
If you have an employer-sponsored retirement plan:
To qualify for a full deduction up to the amount of your contribution limit, you need to earn $64,000 or less if youâ€™re filing independently. If youâ€™re married or filing jointly, youâ€™ll need to earn $103,000 or less.
You can qualify for a partial deduction if you make between $64,000 and $74,000 as a single filer or between $103,000 and $123,000 if youâ€™re filing jointly.
If you donâ€™t have an employer-sponsored retirement plan:
You can qualify for a full deduction of the amount of your contribution limit no matter what your salary is whether youâ€™re filing jointly or independently. Keep in mind that if you file jointly, your partner canâ€™t have a plan thatâ€™s covered by work.
If you donâ€™t have a plan covered by work but your spouse does, your AGI will need to be below $193,000 to qualify for a full deduction.
When it comes to taking money out of your Traditional IRA, age matters.
If youâ€™re younger than 59 and a half: You can withdraw but your withdrawals are subject to a 10% tax penalty. Depending on your situation, though, you might be able to get an exemption.
Exemptions to the age rule include:
If youâ€™re 59 and a half or older: You can start taking money out of your Traditional IRA without getting hit with a penalty.
If youâ€™re 70 and a half: With Traditional IRAs, you must start taking money out at this age. Itâ€™s also known as a required minimum distribution (RMD).
If youâ€™re unsure if you should open a Traditional IRA, make sure you compare your options to other retirement plans.