Traditional IRA

Last updated: April 9, 2016

The Pros and Cons of an IRA

There’s a Limit to How Much You Can Put in

You may set aside up to $5,500 of your earnings in an IRA for 2015.

  • And if you are age 50 or older by the end of the year, you can add an extra $1,000 in “catch up” contributions, for a total of $6,500. (The contribution limits may increase in the future.)

  • In most cases, you can deduct your IRA contribution if you are not covered by a retirement plan at work.

Employer-Provided Plans and Limits

If you have an employer-provided plan, the deductibility of your contribution hinges on your income.

  • You can deduct your full IRA deposit if:

    • You are married and your adjusted gross income doesn’t top $118,000 in 2015.

    • You are single and your income doesn’t exceed $71,000. The deduction phases out above those income levels. (Income-eligibility limits will increase in future years to keep pace with inflation.)

  • If you are married and not covered by a retirement plan at work but your spouse is, you can deduct your full IRA contributions if your joint income doesn’t exceed $193,000 in 2015.

    • If you work but your mate doesn’t, you can set up a spousal IRA for him or her and contribute the maximum $5,500 for or $6,500 if he or she is 50 or older.

When to Pay Into It

You don’t have to rush to contribute to your IRA by the end of the year. You have until April 15 of the following year—the day your tax return is due—to contribute.

  • That gives you until April 15, 2015, for example, to make a tax-deductible IRA contribution for 2014 and deduct it on that year’s return.

  • If you’re in the 25% bracket and contribute $5,000 to an IRA, it will save you $1,250 on your federal taxes (plus additional savings on your state income taxes).

Benefits of an IRA

The upfront tax deduction is nice, but the real beauty of an IRA is that your earnings accumulate tax-deferred, supercharging the already powerful effect of compounding. A yearly $5,000 IRA contribution earning 8% per year over 20 years will grow to more than $247,000, significantly more than if those savings were held in a taxable account (see box below).

Possible Drawbacks

The tax deduction and deferral are the carrots. Here’s the stick to enforce disciplined savings for retirement: Touch the money before you’re 591⁄2 years old and you’ll be slapped with a 10% early-withdrawal penalty, on top of having to pay income tax on every dime you withdraw.

  • There are a few exceptions to the early-withdrawal penalty. It’s waived, for example, if you use IRA funds to pay for :

    • College expenses

    • Use up to $10,000 to buy a first home for yourself or family members

    • Or use IRA money to pay medical expenses in excess of 7.5% of your adjusted gross income.

Between ages 591⁄2 and 701⁄2, you can take as much or as little out of your IRA as you want without penalty. The income-tax bill will still apply. Once you reach age 701⁄2, you must take annual distributions based on your life expectancy. If you don’t, you’ll face a stiff penalty—50% of the amount you failed to withdraw.

*The information on this page is credited to IPT and Kiplinger. Their original materials are made available by the Kansas Securities here.

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