If you want to limit your tax liability right now, investing money in a traditional IRA might be a smart move for you. There are, however, contribution phaseout limits based on your income that can limit how much you can contribute.
Each year, the Internal Revenue Service (IRS) uses inflation to decide if they should increase contribution limits for retirement accounts. The traditional IRA contribution limit for 2019 is $6,000. The age 50 “catch up” limit is fixed by law at $1,000 for every year.
Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution. Withdrawals in retirement are taxed at ordinary income tax rates.
Income and age parameters with traditional IRAs
- Income earners who are younger than 70½ can contribute to a traditional IRA. The contribution is tax-deductible depending on your income and whether you or your spouse (if you’re married) are covered by a retirement plan through your job (such as a 401(k)).
- There are no income limits as to how much you can contribute.
- You must begin withdrawing from your traditional IRA by April 1 the year after the year you reach age 70½.
- You can no longer contribute to your traditional IRA account in the year you reach 70½.
Considering tax savings with traditional IRAs
- Contributions you make to a traditional IRA may be fully or partially deductible, based on your circumstances.
- Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed.
- You have until the tax filing deadline of next year (April 15, 2020) to complete your contribution.
- If you make withdrawals before you’re 59½, you might have to pay a 10% penalty.