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As we discussed last week, the tax deadline for federal income returns is fast approaching. Unless you’re filing an extension to push your tax deadline back six months, you’ll be expected to file by April 15. Even though you can extend your federal income tax deadline, not all deadlines are flexible. The deadline to file Roth IRA contributions is a rigid one.
When it comes to IRA contributions, you can fund a Traditional IRA, Roth IRA, or both, but the maximum contribution allowance, either $5,500 or $6,500 depending on your age, applies to the total of the contributions you make between both accounts. Therefore, you can’t contribute $5,500 or $6,500 to each, it’s $5,500 or $6,500 combined.
But how do Roth IRAs differ from Traditional IRAs? Well, both accounts prevent taxation on the investment earnings within the account, but that’s about the extent of their similarities.
With a Traditional IRA, there’s an age limit for when you’re allowed to make contributions, but that’s not the case with a Roth IRA. Additionally, Traditional IRA contributions are made with pre-tax dollars, whereas the contributions to a Roth IRA are made with after-tax dollars. This means that you can’t deduct your contributions from your income tax.
However, after you reach age 59.5, all of your distributions from your Roth IRA can be made tax-free, as long as they’re made five years after you started contributing to your Roth IRA account. Traditional IRA distributions are usually fully taxable; the benefit in those cases is that participants are typically in a higher tax bracket while making the contributions (which are pre-tax), and then in a lower tax bracket when taking the distributions (which are taxed).
Additionally, if your income was too high last year, you can’t contribute to a Roth IRA. If your modified adjusted gross income (MAGI) was between or above $112,000-127,000 if you’re single or $178,000-$188,000 if you’re married and filing jointly, you’re either within the phase-out range or above it. This means that the amount you’re allowed to contribute to a Roth IRA is reduced beginning when you make $112,000 if you’re single and $178,000 if you’re married and filing together, and is completely eliminated when you make or exceed $127,000 or $188,000 respectively.
