This article was updated for Tax Year 2024, last edited on January 14, 2025.
Let’s chat about Individual Retirement Accounts, or IRAs. They’re a great way to stash away some cash for retirement while getting some tax benefits along the way. There are two main types: Traditional and Roth.
Contributing to your IRA
Traditional IRA contributions
With a Traditional IRA, the money you put in might be fully or partially tax-deductible, helping to lower your taxable income.
However, if you or your spouse has a retirement plan at work, a 'phase-out range' applies. This means your deduction gradually decreases as your income grows and eventually stops once you hit a certain limit set by the IRS.
Roth IRA contributions
Roth IRA contributions aren’t tax deductible, but you can add money anytime from January 1 all the way to the tax deadline the following year. For example, you can add money for 2024 from January 1, 2024, through April 15, 2025.
Contribution limits
For tax year 2024, the contribution limits are:
Under 50 years old: $7,000
50 or older: $8,000
However, if your taxable income is lower than the limit, you can only contribute up to the amount you earned. For example, if your taxable income is $5,000, your maximum contribution would be $5,000.
For tax year 2023, the limits were slightly lower: $6,500 (or $7,500 if you’re over 50).
Benefits of IRAs
Traditional IRA
You can make pre-tax contributions, which can be a nice perk for your paycheck!!
Your contributions may be deductible in the year you make them if your contributions aren’t made with pre-tax dollars..
You don’t pay taxes on the money until you withdraw it, which is great for current tax savings.
Once you hit 59½, you can take money out without penalties (but you will owe taxes on it). Keep in mind that you’ll need to start taking required distributions at age 73.
Roth IRA
There’s no age requirement to start taking distributions, which gives you some flexibility.
You contribute with after-tax money, so you don’t get a deduction upfront. However, if you meet certain conditions, your withdrawals can be entirely tax-free. Those conditions include:
You’ve had the Roth IRA for at least five years and, one of the following applies:
You’re 59½ or older when you take the withdrawal
You’re disabled
The money is withdrawn by your beneficiaries after your death
If you meet those conditions, you can benefit from tax-free withdrawals.
IRA management fees
It’s important to note that you can’t deduct IRA management fees on your federal tax return.
Distributions from your IRA
When you withdraw money from your IRA, some or all of it might be taxed unless it’s a qualified withdrawal from a Roth IRA. The easiest way to see what’s taxable is to check your 1099-R form, which you’ll get each year you take money out.
This content is provided for informational purposes only and should not be construed as tax, legal, financial, accounting, or other advice. Rules and regulations vary by location and are subject to change, so please consult with an expert if you need advice specific to you.
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