Many financial gurus recommend that future retirees should need 80 to 100% of their retirement income to live comfortably. Considering the unforeseen financial meltdown and family/medical emergencies, a 401(k) alone may not be enough to support your retirement lifestyle. One of the common options to supplement your retirement savings is the Individual Retirement Account (IRA), especially you have already contributed the maximum to your 401(k). IRA has two different types of options.
- Traditional IRA
- You must be under 70½ years of age.
- You can contribute up to $5,500 a year, or up to $6,500 a year if you are 50 years old or older, for 2015 – 2017. The IRA contribution limit does not apply to:
- Rollover contributions
- Qualified reservist repayments
- Eligible taxpayers can take a tax deduction on their IRA contributions, although its eligibility phases out above certain adjusted gross income limits.
- Retirement contributions can grow tax-deferred until withdrawn.
- Penalty-free withdrawals for first home purchase and certain college expenses.
- You must begin taking required minimum distributions (RMDs) at age 70½.
- No restrictions on contributions, but possibly on deductions.
2. Roth IRA
- Taxes are paid up front. In other words,- contributions are made with already-taxed dollars and thus there is no deduction for contributions.
- Contributions (not earnings) can be withdrawn tax-free any time, without penalty at any age.
- Eligibility for contribution to Roth IRA phases out above certain adjusted gross income limits. Modified adjusted gross income limit (MAGI) for 2017 is $133,000 for single filers and $196,000 for married filing jointly.
- There is no age restriction. You can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age (even after you reach 70½ and older). There is no required minimum distribution.
- Earnings can be withdrawn tax- and penalty-free at age 59½ if account has been active for at least five years.
- In 2010, income limits that traditionally kept high-earning individuals from converting to a Roth IRA were repealed. So, it gets easier to convert an existing traditional IRA to a Roth IRA.
For tax issues with IRA contributions and earning, please visit https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.