Traditional IRAs can be a powerful tool to lower taxes while saving for retirement or other predetermined uses. Here are five lesser-known facts about IRAs.
1. A non-working spouse can have an IRA.
If your spouse doesn’t work, you may still be able to open and contribute to an IRA for your spouse, assuming that the household has earned income and that you file a joint tax return. This can be a great way to reduce your taxable income each year.
2. Children can have IRAs.
If your child has earned income, you can open and contribute to an IRA. Just ensure you can document the earnings. While your child can contribute their own earnings, many parents will help keep track of things like babysitting money, then match those earnings in either a traditional or ROTH IRA. In many cases, a ROTH IRA is preferred, because the future earnings could be tax free. Your child’s IRA is managed by an adult as a custodial account until the child is old enough for the account to be transferred to their name.
3. You may still contribute to an IRA, even if you have a 401(k) or similar program at work.
As long as you do not exceed the income limits, deductible contributions to traditional IRA are allowed in addition to other forms of retirement savings plans. Once your income exceeds the phase-out thresholds, your contributions become non-deductible.
4. Non-deductible contributions can be made.
Unlike some types of IRAs, contributions are allowed to Traditional IRAS even if you exceed the income phaseout for deductibility. In other words, you can make the contribution, but it can’t be deducted on your tax return. Regardless, some savers may still want to make after-tax contributions to a non-deductible IRA, as the earnings can grow tax-deferred.
5. It’s not just for retirement.
Generally speaking, with traditional IRAs, if you withdraw funds before the age of 59 1/2 you may be subject to income tax AND an early withdrawal penalty. But there are exceptions to this rule. These include withdrawals for a first time home purchase, major medical bills, college costs, birth/adoption and many others. However, it is important to know the rules BEFORE you withdraw the funds.
Tax rules surrounding IRAs are vast and complex, but within the rules are numerous opportunities that can help you plan for a more tax-efficient future. Always seeks qualified advice from a financial professional prior to investing.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.
This blog post contains information courtesy of Mostad Marketing Cloud, provider of tax and financial planning content. The post has been edited by Wisdom Wealth Strategies advisors.