When it is time to start planning for your retirement, you should know that Social Security retirement benefits alone will not likely be sufficient to ensure a comfortable retirement. The only way to secure your retirement years is to plan ahead by saving and investing. One of the best, and most common, ways to do this is through an Individual Retirement Account or IRA. Clients who have already established an IRA, often ask who can put money into an IRA? This article will discuss the requirements and limitations on IRA contributions, imposed by the IRS.
What exactly is an IRA?
An IRA is basically a tax-deferred savings account, established under the applicable IRS guidelines. There are four categories of IRAs to choose from. Traditional IRAs and Roth IRAs are created by individuals. Simplified Employee Pension (SEP) and a Savings Incentive Match Plan for Employees (SIMPLE) are established through an employer and often include matching investments of by the employer. All types of IRAs are considered “fully vested,” which simply means that all of the contributions and earnings from the IRA, including the matching contributions made by employers, belong to the individual, without condition.
Contributions (the fancy term for the money put in an IRA account) are governed by rules and limitations depending on the type of IRA you have. Determining who can contribute to an IRA, also depends on the type of IRA you have.
What do I need to know about “contributions?”
An IRA is essentially a special type of savings account. One requirement is that all contributions be made in cash. Each type of IRA has its own limit on the amount of contributions that can be made each year. There are also some conditions that need to be met before these contributions can be made.
Contributions to Traditional IRAs
As long as you, or your spouse, receive taxable income and are still under the age of 70 ½, there is no restriction on who can contribute to your traditional IRA. There is an age restriction that applies, however. No one is allowed to make contributions to a traditional IRA if they have reached the age of 70 ½ years. There is a set maximum amount of contributions allowed for traditional IRAs each year.
In 2015, the maximum contribution to a traditional IRA is $5,500, if you are less than 50 years of age, and $6,500 if you are over 50. This amount is also subject to change each year, so confirm the current limitation before you begin making your contributions. If your contributions exceed the limitations, the excess amount will be taxed at 6% each year, as long as that excess remains in the IRA.
Contributions to Roth IRAs
Roth IRAs, on the other hand, do not have the same age restrictions as traditional IRAs. However, your contributions to a Roth IRA are only tax deductible if you meet specific qualifications. For example, in order to contribute to a Roth IRA, you have to meet the established income requirements.
In 2015, the income limits for making contributions to a Roth IRA are between $116,000 and $131,000 for individuals and $183,000 to $193,000 for married couples. Individuals and couples making slightly more may still be able to make partial contributions. Discuss these options with your retirement planning attorney.
An employer can have a maximum of 100 employees, earning more than $5000 each, in order to sponsor a SIMPLE IRA for its employees. However, there cannot be any other form of retirement plan available. The maximum contribution to a SEP IRA this year is $53,000. The maximum contribution to a SIMPLE IRA is $12,500, if you are under age 50, and $15,500 if you are older than 50. The employer-sponsored IRAs (SIMPLE and SEP) can also be used by self-employed individuals and small business owners.
If you have questions regarding IRA contributions, or any other retirement planning needs, please contact the Schomer Law Group either online or by calling us at (301) 337-7696.