Contributed by: Kali Hassinger, CFP®, CDFA®
Many are focused on filing their taxes by April 15th, but that day is also the deadline to make a 2019 IRA contribution! With only a week left, how will you decide between making a Roth or a traditional IRA contribution? There are pros and cons to each type of retirement account, but your individual situation will determine the better option. Keep in mind, the IRS has rules to dictate who can make contributions, and when.
2019 Roth IRA Contribution Rules/Limits
For single filers, the modified adjusted gross income (MAGI) limit is phased out between $122,000 and $137,000.
For married filing jointly, the MAGI limit is phased out between $193,000 and $203,000
Please keep in mind that for making contributions to this type of account, it makes no difference if you are covered by a qualified retirement plan at work (401k, 403b, etc.), you simply have to be under the income thresholds.
The maximum contribution is $6,000 for those under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.
2019 Traditional IRA Contributions
For single filers covered by a company retirement plan, the deduction is phased out between $64,000 and $74,000 of MAGI.
For married filers covered by a company retirement plan, the deduction is phased out between $103,000 and $123,000 of MAGI.
For married filers not covered by a company plan, but have a spouse who is, the deduction for your IRA contribution is phased out between $193,000 and $203,000 of MAGI.
The maximum contribution is $6,000 if you’re under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.
Now, you may be wondering what type makes more sense for you (if you are eligible). Well, like many financial questions…it depends!
Roth IRA Advantage
The benefit of a Roth IRA is that money grows tax deferred. So, when you are over age 59 1/2 and have held the money for 5 years, the money you take out is tax free. However, in exchange for tax free money, you don’t get an upfront tax deduction when investing the money in the Roth. You are paying your tax bill today rather than in the future.
Traditional IRA Advantage
With a traditional IRA, you get a tax deduction the year you contribute money to the IRA. For example, a married couple filing jointly has a MAGI of $190,000 putting them in a 24% marginal tax bracket. If they made a full $6,000 traditional IRA contribution they would save $1,440 in taxes. To make that same $6,000 contribution to a Roth, they would need to earn $7,895 to pay 24% in taxes in order to then make the $6,000 contribution. The drawback of the traditional IRA is that you will be taxed on it later in life when you begin making withdrawals in retirement. Withdrawals taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Pay Now or Pay Later?
Future tax rates make it challenging to choose what account type is right for you. If you go the Roth IRA route, you will pay your tax bill now. The downside is that you could find yourself in a lower tax bracket in retirement. In that case, it would have been more lucrative to take the other route. And vice versa.
How Do I Decide?
We typically recommend Roth contributions to young professionals because their income will most likely increase over the years. However, if you need tax savings now, a traditional contribution may make more sense. A traditional IRA may be the best choice if your income is stable and you’re in a higher tax bracket. However, you could be disqualified from making contributions based on access to other retirement plans.
As always, before making any final decisions, it’s always a good idea to work with a qualified financial professional to help you understand what makes the most sense for you.
Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.
