Looking to Fund Your 2017 IRA? There’s Still Time.
If you still want to contribute to or open a self-directed investment retirement account (IRA) for 2017—either a Traditional IRA or Roth IRA—you have until the tax filing deadline on April 17, 2018*. There are many benefits to having and funding an IRA account that extend beyond tax incentives. IRAs are also a great tool for saving for your financial future, as the earnings generated from your contributions grow tax-free within the account. However, it’s worth noting the differences between Traditional IRAs and Roth IRAs in order to select the best option for you.
Traditional IRAs vs Roth IRAs
Both Traditional and Roth IRAs offer generous tax breaks, but differ in when you can claim them. Traditional IRA contributions are tax deductible for the year you make the contribution, with your later retirement withdrawals taxed at ordinary income tax rates. Roth IRAs, on the other hand, do not provide tax breaks when you make the contributions, but all of the subsequent retirement withdrawals are typically tax-free.
The tables below show the income limitations and phase-out ranges for both Traditional and Roth IRAs, per the U.S. Tax Reform Bill passed by congress at the end of last year.
Roth IRAs make sense if you expect your tax rate to be higher by the time you retire, making it an ideal investment vehicle for younger workers with lower incomes who won’t miss the upfront tax deductions from their contributions. The challenge with Roth IRAs for many people is the contribution income limit, which they can exceed over the course of their careers as their annual income increases.
A Workaround Path for Roth IRAs
According to PlainsCapital Bank Wealth Strategist Chip Glispin, if you can't contribute to a Roth IRA due to income limitations, there's an easy workaround. If you haven't yet reached age 70½, you can simply open a non-deductible traditional IRA account and then immediately convert it to a Roth IRA (sometimes called a backdoor Roth).
“If you think tax-free income in retirement would be important to you, but you are not eligible to make an annual contribution because of the income limits—you may want to consider a Roth IRA conversion,” said Glispin.
The main caveat to a Roth IRA conversion is the pro-rata rule which requires that you aggregate all IRAs that you own to calculate the taxable portion of the conversion. Because of this, a Roth IRA conversion is well suited to individuals who do not already have existing IRA accounts.
Many younger people do not have established self-directed investment retirement accounts and are therefore excellent candidates for Roth IRAs. If they are currently unable to save for retirement due to living needs, parents or grandparents may consider financial gifting to help fund their retirement. As mentioned in a previous blog poston financial gifting, there is a growing trend of family members contributing to children’s and grandchildren’s Roth IRAs.
PRO TIP: Glispin advises consulting a tax professional or banking financial advisor to calculate the financial implications of a Roth IRA conversion.
To speak with a PlainsCapital Bank Wealth Management professional about IRA accounts and other financial investment strategies, visit the PlainsCapital Bank website or email firstname.lastname@example.org be connected with a wealth management advisor.
Traditional IRA income limits
The income limits for determining the deductibility of traditional IRA contributions in 2018 have increased. If your filing status is single or head of household, you can fully deduct your IRA contribution up to $5,500 in 2018 if your modified adjusted gross income (MAGI) is $63,000 or less (up from $62,000 in 2017). If you're married and filing a joint return, you can fully deduct up to $5,500 in 2018 if your MAGI is $101,000 or less (up from $99,000 in 2017). Note that these figures assume you are covered by a retirement plan at work.
If you're not covered by an employer plan but your spouse is, and you file a joint return, your deduction is limited if your MAGI is $189,000 to $199,000 (up from $186,000 to $196,000 in 2017), and eliminated if your MAGI exceeds $199,000. Single filers, head-of-household filers, and married joint filers who are not covered by an employer plan can deduct the full amount of their contributions.
Roth IRA income limits
The income limits for determining how much you can contribute to a Roth IRA have also increased for 2018. If your filing status is single or head of household, you can contribute the full $5,500 to a Roth IRA if your MAGI is $120,000 or less (up from $118,000 in 2017). And if you're married and filing a joint return, you can make a full contribution if your MAGI is $189,000 or less (up from $186,000 in 2017). (Again, contributions can't exceed 100 percent of your earned income.)
*Important Disclosures: PlainsCapital Bank does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publically available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
*Not including tax extensions