Tax Topic

IRA Contributions

There are a few types of IRAs (Individual Retirement Accounts), but the most common are the Traditional IRA and the Roth IRA. Generally, once you contribute to an IRA, you cannot withdraw the funds until you are 59½ (and at least five years after opening a Roth IRA) without a 10% penalty (there are a very few exceptions). You may contribute up to $6,000 ($7,000 if at least 50 years old in 2022) in total to any combination IRAs each year assuming you (or your spouse) have at least that much in "earned income" (wages or self-employed earnings). The due date for 2022 IRA contributions is April 18, 2023.

Both Traditional and Roth IRAs can be set up at most financial institutions - banks, investment houses, insurance companies. They are generally "self-directed," meaning once your funds are in the account, you decide how they will be invested. Anything from CDs to stocks to bonds. I generally recommend you do not invest in real estate or REITs within your IRA.

A Roth IRA is about the best deal going from an income tax perspective. Roth IRA contributions are not deductible but based on current law all earnings in a Roth IRA account will be tax free. There are income limits on contributing to a Roth IRA, however. Contributions to a Roth IRA are not deductible and are limited based on your Modified AGI as follows for 2022 (phase out range):

• Single or Head of Household, $129,000 - $144,000
• Married filing joint, $204,000 - $214,000
• Married filing separately, $0 - $10,000

Contributions to a Traditional IRA can be deductible depending on your (and your spouse's) filing status and retirement plan coverage at work. If you (or you and your spouse) do not have any other retirement plan at work, your Traditional IRA contribution is fully deductible. If you are covered by a retirement plan at work, the deductibility of your Traditional IRA phases out as follows:

• Single, $68,000 - $78,000
• Married Filing Joint, varies depending on coverage by retirement plan for each spouse

Qualified distributions withdrawn from a Roth IRA after you reach the age of 59 ½ are tax free, both the original contributions and all earnings. No time limit or forced time of withdrawal.

Monies withdrawn from a Traditional IRA after you reach the age of 59 ½ are taxed at whatever your ordinary income tax rate is in the year of the withdrawal. Originally-deductible contributions are fully taxed, as are all earnings (regardless of how the earnings were generated). Originally non-deductible contributions (caused by an income phase out in the year of contribution) are not taxed since they were taxed in the original year. The latter situation can get a bit complicated if you have multiple IRAs. You must start taking withdrawals from your Traditional IRA when you reach 72 (if you reached 70 by July 1, 2019 or later) or 70 ½ otherwise.

For more information on IRAs: https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras

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