When it comes to contributing to an IRA, it all depends on the type of account you have. Traditional IRAs are open to almost anyone who earns taxable income and is under the age of 70 and a half. However, your contributions may only be tax-deductible if you meet certain requirements. For more information on these requirements, please refer to Who can contribute to a traditional IRA?Two common types of IRAs are traditional and Roth IRAs.
Earnings from these accounts may be tax-free or taxed at a later date. Additionally, you may be able to deduct contributions to a traditional IRA. Unfortunately, a Roth conversion cannot be re-characterized.The total contribution to all your traditional and Roth IRAs cannot exceed the annual maximum for your age or 100% of earned income, whichever is lower. A popular strategy is to make a non-deductible contribution to a traditional IRA and then convert it into a Roth IRA.
To recharacterize a contribution to a regular IRA, you must instruct the trustee of the financial institution that holds your IRA to transfer the amount of the contribution plus the profits to a different type of IRA (either Roth or traditional) in a transfer from trustee to trustee or to a different type of IRA with the same trustee.You can contribute to a traditional or Roth IRA even if you participate in another retirement plan through your employer or company. If your income is too high, you cannot contribute to a Roth IRA and you can only contribute what you earn in a given year. If you file a joint return and have taxable compensation, you and your spouse can contribute to your own separate IRA accounts. Your total contributions to your IRA and your spouse's IRA cannot exceed your combined taxable income or the annual IRA contribution limit multiplied by two, whichever is lower.Roth IRAs are funded with after-tax dollars; this means that contributions are not tax-deductible.
If you have the money and meet the income limits, you can contribute to a 401 (k) plan at work and then contribute to your own Roth IRA. If you're covered by a company plan, a second test decides how much you can deduct from your IRA contribution.By contrast, traditional IRA deposits are generally made with pre-tax dollars; you usually get a tax deduction on your contribution and you pay income tax when you withdraw money from your account in retirement. If this is done before the deadline for filing your tax return (including extensions), you can consider the contribution as being made to the second IRA of that year (effectively ignoring the contribution to the first IRA).When comparing these two options, it's important to understand the implications and rules of contributions to both traditional and Roth IRAs. You can still contribute to a Roth IRA and make cumulative contributions to either type of account regardless of your age.
If neither you nor your spouse were actively involved in a business plan, you can deduct your contributions to the traditional IRA regardless of how high your income is.
