Jacksonville Tax & Accounting Services

904-470-4010

What You Need to Know About IRAs


Individual retirement accounts (IRAs) are retirement savings accounts that help people prepare for their future financial security in a tax-advantaged manner. They are relatively easy to open, contribute to, and invest in. There are two main types of IRAs -- traditional IRAs and Roth IRAs. Each has different tax benefits and eligibility requirements. Here's what you need to know to help you determine if an IRA could play an important role in your retirement planning.

Traditional IRAs

Your contributions to a traditional IRA are fully tax deductible when you and your spouse are not active participants in a workplace retirement plan. If you or your spouse actively participate in an employer plan, your ability to make a tax deductible contribution depends on your modified adjusted gross income (AGI) for the tax year. As income rises above certain thresholds, the tax deduction is reduced and eventually eliminated.*

Any earnings on investments held in a traditional IRA grow tax deferred. You will only pay taxes (at ordinary income tax rates) when you make withdrawals from the IRA, typically at retirement.

Roth IRAs

Your contributions to a Roth IRA are not tax deductible; you contribute with after-tax income. However, Roth IRA earnings accumulate tax deferred. You can withdraw your annual Roth contributions tax free at any time for any purpose. Once you have owned a Roth IRA for five tax years, distributions of Roth IRA earnings are also tax free if they are made:

  • On or after you reach age 59½;
  • For first-time home buying expenses (lifetime maximum of $10,000);
  • On account of you becoming disabled; or
  • To a beneficiary or your estate after your death.

Eligibility to contribute to a Roth IRA depends on your modified AGI. As AGI rises above certain thresholds, the allowable Roth contribution is gradually reduced to zero.** The Roth IRA income limits apply whether or not you participate in an employer's retirement plan.

Timing Contributions

Eligible individuals may contribute as much as $6,000 (total) to one or more IRAs for 2022, or the amount of annual compensation, if less. The contribution limit for future years is subject to adjustment for inflation. A married couple may contribute up to twice the annual limit (or their joint annual compensation, if less), even if one of them does not earn income. An additional "catch-up" contribution of up to $1,000 is allowed for individuals age 50 or older.

You have until the April tax-filing deadline to contribute to an IRA for the prior year. You are not required to make your IRA contribution for the year in the full amount. However, if you can afford to do so, it may make sense for you to make your contribution as soon as you are eligible -- January 1 of the year for which the contribution is being made. The earlier you contribute, the sooner your contribution can be invested and working on your behalf.

Selecting Investments

IRA providers offer account holders a variety of investment choices. Pay attention to taxes when choosing investments for your IRA. You won't receive a tax benefit from holding certain investments, such as municipal bonds, in an IRA because municipal bond interest is generally not subject to federal income tax. However, keeping securities that pay taxable interest, such as corporate bonds, in your IRA may be advantageous since the interest income could accumulate tax deferred.

Your financial professional can explain in greater detail how you might benefit from opening either a traditional or a Roth IRA.

Source/Disclaimer:

*The 2022 phaseout ranges for deductible IRA contributions are $68,000 - $78,000 for single and head-of-household taxpayers, $109,000 - $129,000 for married taxpayers filing jointly, and $0 - $10,000 for married taxpayers filing separately. The deduction for a married taxpayer filing jointly who doesn't participate in an employer plan (but whose spouse does) phases out with joint AGI between $204,000 and $214,000.

**The 2022 phaseout ranges for Roth IRA contributions are $129,000 - $149,000 for single and head-of-household taxpayers, $204,000 - $214,000 for married taxpayers filing jointly, and $0 - $10,000 for married taxpayers filing separately.