Retirement savings is a top priority for many Savers. If you are Active-Duty Military or a DoD civilian employee you have access to the Thrift Savings Plan (TSP). Eligible service members now have access to the new Blended Retirement System.
Unfortunately, many spouses and family members do not have access to an employer-sponsored retirement plan, such as a 401(k) plan. Even if a spouse or family member's employer doesn’t offer a retirement plan, you can still save for their retirement, and get some tax benefits in the process, by putting money in an Individual Retirement Account (IRA).
>>Check out this blog and video on How to Win with the Military's Blended Retirement System, courtesy of the USAA Educational Foundation Command Your Cash.
Saving at Work
Who qualifies to make IRA contributions?
Anyone who earns income (or receives alimony) can put money in an IRA. Couples can also put money in an IRA for a non-working spouse.
Each person can contribute up to $6000 in an IRA if you are age 49 or below and up to $6500 if you are age 50 and above for the 2019 tax year, so long as your contributions do not exceed your earned income. Each year you have until the April 15 tax filing deadline to make your IRA payment for the previous tax year.
There are two main types of IRA – traditional IRAs and Roth IRAs. In addition, those who are self-employed can put money in a SEP-IRA. Each has its own set of rules and offers different tax benefits. This article will deal with traditional and Roth IRAs.
Traditional IRAs are open to anyone up to the age of 70 1/2. Money in a traditional IRA grows tax-deferred. In other words, you won’t have to pay taxes on any earnings until you take the money out. That allows your money to grow faster than it would if you had to pay income tax each year on those earnings.
Traditional IRAs Offer Tax Deductible Contributions
Your contributions to a traditional IRA may also be tax deductible, which is an attractive feature for many people. That’s because you get a portion of your IRA payment “back” immediately in the form of a lower tax bill.
If you are not eligible for an employer sponsored retirement plan, you can make tax-deductible contributions to a traditional IRA. You can also do so if your income falls below certain levels, regardless of your retirement plan status.
For tax year 2019, couples filing a joint tax return who report adjusted gross income up to $103,000, and single filers with income up to $64,000, are eligible to make fully deductible contributions to a traditional IRA. In addition, taxpayers with incomes slightly above these limits - $103,000 to $123,000 for couples and $64,000 - $74,000 for singles - can make partially deductible contributions. Find out more information at irs.gov.
When you put money in a traditional IRA, you can’t get it out before you reach age 59 1/2 without paying a penalty, although there are exceptions. Some people consider this a disadvantage of traditional IRAs, but it can help keep your retirement savings on track. You also cannot contribute to a traditional IRA after you reach the year in which you turn age 70 ½.
Once you start taking money out of a traditional IRA in retirement, you will have to pay ordinary income tax on any earnings and on your tax-deductible contributions, but no federal taxes on withdrawals of non-deductible contributions. Depending on where you live, you may have to pay state taxes on those withdrawals.
ROTH IRAs Offer Tax-Free Withdrawals
The benefits of Roth IRAs are almost exactly opposite those of traditional IRAs. Spousal ROTH IRAs are the same.
You can’t make tax-deductible contributions to a Roth IRA. On the other hand, the money you put in a Roth IRA grows not just tax-deferred, but tax-free. In other words, you won’t have to pay any federal taxes, or state taxes in most states, on your earnings when you take money out, provided you meet certain requirements. You are also less likely to have to pay a tax penalty if you withdraw money early from a Roth IRA.
There are no age limits for contributions to a Roth IRA, so long as you have earned income. On the other hand, there are income limits. However, those limits are quite high. Singles who report adjusted gross incomes of up to $122,000 in 2019 and couples with incomes up to $181,000 qualify for a full contribution. Taxpayers with slightly higher incomes – $122,000 - $137,000 for singles and $193,000 - $203,000 for couples filing jointly – can make partial contributions. Find out more information at irs.gov.
Where Can You Open an IRA?
Virtually all major financial services companies – such as banks, brokers, insurance, and mutual fund companies – offer IRAs and make it easy to open an account.
A reputable mutual fund company that offers a wide selection of funds, low costs, and reasonable minimum investment requirements, is a particularly good option for many. Many of the top companies also offer excellent educational materials to help you pick the best funds for you.
Regardless of where you decide to open an account, your retirement savings will get a real boost if you commit yourself to making annual contributions an IRA.