What You Should Know About Contributing to an IRA at Every Age

What You Should Know About Contributing to an IRA at Every Age

February 25, 2020

A traditional IRA offers a great way to shield income from taxation while boosting your retirement accounts. Meanwhile, a Roth IRA can let you pay tomorrow's taxes today. But how can workers who are eligible to contribute to either type of account decide where to allocate their retirement funds? Learn more about contributing to an IRA at every age and stage of your career. 

IRA Contribution and Deductibility Limits

All workers who have any earned income are eligible to contribute to a traditional IRA (at least up to the total amount of their earned income for the year).1 For many taxpayers, the ability to deduct IRA contributions can mean the difference between taxes owed and a tax refund. 

However, this IRA contribution isn't tax-deductible for everyone. If you're covered by a retirement plan at work and your household income exceeds the following levels,2 your deduction may be limited or eliminated:

  • For single or head of household taxpayers, a modified adjusted gross income (MAGI) of $65,000 to $75,000 will limit the IRA deduction, while a MAGI of more than $75,000 will eliminate it completely;
  • For taxpayers who are married filing jointly, a MAGI of $104,000 to $124,000 will limit the IRA deduction, while a MAGI of more than $124,000 will eliminate it completely; and
  • For taxpayers who are married filing separately, the IRA deduction is eliminated when the taxpayer's MAGI exceeds $10,000.

Another retirement savings vehicle is the Roth IRA. This IRA does not permit deductible contributions but instead allows for tax-free growth—that is, after turning 59.5, the account holder can withdraw any amount from the Roth without paying a dime in tax.3

  • Taxpayers who are married filing jointly can contribute up to the maximum to a Roth IRA ($6,000 in 2020, or $7,000 for those age 50 and over) if their MAGI is below $196,000.4
  • Single taxpayers with a MAGI of less than $124,000 can also contribute up to the maximum to a Roth IRA. 

Taxpayers who are not able to deduct their contributions to a traditional IRA but who are still below the Roth IRA income limits may instead arrange a "back door" Roth IRA contribution. By making a non-deductible contribution to one's traditional IRA, then immediately converting the contribution by transferring it to a Roth account, the worker can enjoy tax-free growth. 

How Your IRA Strategy Can Shift Over Time

There's absolutely no one-size-fits-all strategy when it comes to IRA contributions. Despite this, there are a few rules of thumb workers may want to keep in mind when evaluating their investment goals or deciding whether to contribute to a traditional IRA, a Roth IRA, or both.

Low Effective Tax Rates Can Make a Roth a No-Brainer

Because a Roth IRA can offer decades of tax-free growth, it can make sense to contribute to a Roth IRA instead of a traditional one if your effective tax rate is currently very low and you're expecting to pay a higher tax rate in retirement. People who are just starting out in the workforce may opt for a Roth instead of a traditional IRA to take advantage of the low effective tax rates they're paying.

Deductible IRA Contributions Can Offer Many Benefits

High earners or those who have spent decades advancing in their careers may gain more benefit from a deductible IRA contribution than a Roth. By lowering one's adjusted gross income (AGI), these contributions can significantly reduce the total tax paid. And because many high earners or long-term workers expect to be in a lower income bracket in retirement, it can make sense to avoid taxes now and pay them at a lower rate in the future.

By continuing to re-evaluate your investment strategies as your income and career path change, you'll be well-positioned to take advantage of any policy changes that could impact the way your retirement accounts are taxed. 


Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.


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