Exploring Your IRA Options

Set yourself up for a generous retirement.

IRAs (Individual Retirement Accounts) are savings accounts designed to give you a tax-efficient way to save for retirement. The two most common are traditional and Roth IRAs. There are rules about who can participate in each type and limits to how much money you can contribute each year. We’ve pulled together the basics here, but you also may want to talk with your competent tax advisor.

Traditional IRA
If you’re under age 70½ and you or your spouse earns compensation, you’re eligible for a traditional IRA. Traditional IRAs are a good option for people who don’t participate in an employer-sponsored retirement plan such as a 401k; however, if you do participate in your employer-sponsored retirement plan, you can contribute to a Traditional IRA as well. Depending on your income, your full IRA contribution may be tax-deductible.

With a Traditional IRA, you must pay taxes on your IRA earnings and any contributions when you withdraw them, and you are required to take annual minimum distributions beginning the year you turn 70½. Upon your death, your beneficiaries will also be subject to required distributions.

A Traditional IRA may make sense if you:

  • Are not eligible to contribute to a Roth IRA
  • Anticipate a higher tax rate while saving (since funds are not taxed when you make contributions)
  • Anticipate a lower tax rate during retirement (since funds are taxed when you take disbursements)
  • Plan to withdraw at least the RMD (Required Minimum Distribution) amounts during retirement
  • Are not concerned about tax implications to beneficiaries.

Roth IRA
A Roth IRA is ideal for someone who participates in an employer-sponsored retirement plan or is not eligible for a traditional IRA for some other reason. To participate in a Roth IRA, your MAGI (Modified Adjusted Gross Income) must be less than the defined limits. With a Roth IRA, your contributions are NOT tax-deductible.

One big advantage of a Roth IRA is that you can withdraw your contributions at any time, without taxes and penalties. And after you have owned a Roth IRA for at least 5 years and are age 59½ or older, disabled or a first-time homebuyer, you can also withdraw your EARNINGS with no tax. With a Roth IRA, you are never required to take distributions, no matter what your age.

A Roth IRA may be right if you:

  • Are not eligible for a traditional IRA
  • Anticipate a lower tax rate while saving (since funds are taxed when you make contributions)
  • Anticipate a higher tax rate during retirement (since funds are not taxed when you take disbursements)
  • Want to avoid RMDs
  • Are concerned about tax implications to beneficiaries
  • Are not eligible to contribute to a Traditional IRA because of the age limit

What are the MAGI* limits?
MAGI is your adjusted gross income before certain deductions or adjustments to income are made, and it can determine your eligibility to participate in a Roth IRA. MAGI limits are subject to annual cost-of-living adjustments (COLAs).

Roth IRA:

Tax-Filing Status Full Contribution Partial Contribution No Contribution Allowed
Single 2016 Less than $117,000 $117,000-$132,000 $132,000 or more
Single 2015 $116,000 or less $116,000-$131,000 $131,000 or more
Married, Filing Jointly 2016 Less than $184,000 $184,000-$194,000 $194,000 or more
Married Filing Jointly 2015 $183,000 or less $183,000-$193,000 $193,000 or more

 

Traditional IRA:

Tax-Filing Status Active Participant Full Deduction Partial Deduction No Deduction Allowed
Single 2016 Yes $61,000 or less $61,000-$71,000 $71,000 or more
Single 2015 Yes $61,000 or less $61,000-$71,000 $71,000 or more
Married, Filing Jointly 2016 Yes $98,000 or less $98,000-$118,000 $118,000 or more
Married, Filing Jointly 2015 Yes $98,000 or less $98,000-$118,000 $118,000 or more
Married, Filing Jointly 2016 No, but spouse is $184,000 or less $184,000-$194,000 $194,000 or more
Married, Filing Jointly 2015 No, but spouse is $183,000 or less $183,000-$193,000 $193,000 or more

NOTE: You may be subject to a 10% early distribution penalty tax on any taxable amount taken from either a Traditional or Roth IRA before you reach age 59 1/2, unless you qualify for one of these penalty exceptions: disability, certain health insurance costs, certain medical expenses, higher education expenses, first-time homebuyer expenses, substantially equal periodic payments, IRS tax levy, qualified military reservist distributions or death (beneficiary distributions).