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Why IRA Accounts Are Better Than Ever

If you wrote them off for retirement savings, take another look


(This article appeared previously on MarketWatch.)

Only a few years ago, IRA contributions were limited to a measly $2,000 a year. Plus, strict income limits prevented many folks from being able to contribute anything at all.

 
No more. Favorable changes to the IRA contribution rules have eased these limitations considerably. So if you haven’t considered the IRA as a fairly powerful retirement savings tool, maybe it’s time to change your thinking.

(MORE: Sizing Up the IRA at 40)

 
Contribution Rules for Traditional IRAs
 
For 2015, you can contribute up to $5,500 to a traditional IRA. Even better, if you’ll be age 50 or older as of Dec. 31, 2015, you can contribute up to $6,500.
 
If you’re married, the same limits apply to your spouse if he or she wants to fund a separate IRA. As a result, the two of you can together contribute up to $11,000 or maybe even $13,000.
 
Whether you’re single or married, and whether you’re 50 or younger, the current IRA contribution limits are generous enough to take seriously (which was not necessarily the case a few years ago).
 
Here are the rest of the traditional IRA contribution ground rules:
 
• After turning 70 1/2, you can’t make any more contributions. However, Roth IRA contributions are still allowed (more on that later).
 
• You, and/or your spouse if you’re married, must have earned income at least equal to what you contribute.
 
• If you are unmarried and covered by a retirement plan in 2015, your eligibility to make a deductible traditional IRA contribution for this year is phased out between adjusted gross income (AGI) of $61,000 and $71,000. However, you can contribute to a traditional non-deductible IRA regardless of how high your income might be.

(MORE: 9 Changes Affecting Your Money in 2015)

 
• If you’re married and both you and your spouse are covered by retirement plans in 2015, your eligibility to make a deductible traditional IRA contribution is phased out between joint AGI of $98,000 and $118,000. Ditto for your spouse. However, you can both contribute to traditional non-deductible IRAs regardless of income.
 
• If you’re married and only one spouse is covered by a retirement plan in 2015, the covered spouse’s eligibility to make a deductible traditional IRA contribution is phased out between joint AGI of $98,000 and $118,000. The non-covered spouse’s eligibility is phased out between joint AGI of $183,000 and $193,000. However, you can both contribute to traditional non-deductible IRAs regardless of income.
 
• These AGI phase-out ranges are considerably higher than just a few years ago.
 
Contribution Rules for Roth IRAs
 
The annual contribution limits and the contribution deadline for Roth IRAs are the same as for traditional IRAs. But the rest of the rules are different:
 
• After age 70 1/2, you can still make Roth IRA contributions — as long as you (and/or your spouse if you’re married) have earned income at least equal to what you contribute.
 
• For 2015, eligibility to make Roth IRA contributions is phased out between AGI of $116,000 and $131,000 for unmarried folks. For married joint filers, the phase-out range is between joint AGI of $183,000 and $193,000.
 
• Eligibility to make Roth IRA contributions is unaffected by whether you (or, if you’re married, your spouse) are covered by a retirement plan.
 
• You can also consider the idea of converting a traditional IRA into a Roth IRA. To be eligible for the conversion privilege a few years ago, your AGI had to be $100,000 or less. That was then. Now, the income restriction on Roth IRA conversions is history. Even billionaires can do Roth conversions under the current rules.
 
Bottom Line
 
You can contribute more to your IRA than ever before, and you have a better chance of deducting contributions to your traditional IRA than ever before. While in the not-too-distant past contributing to IRAs was barely worth the effort, it’s definitely worth the effort now.
 
Ready to go? Good! The IRA contribution deadline for the 2015 tax year is April 15, 2016. However, you can make your contributions any time between now and then — unless you’ve already done it. You can make a contribution for your 2016 tax year as early as Jan. 1, 2016.
 
Of course, the sooner you stash some cash in a traditional or Roth IRA, the sooner you will start collecting the tax benefits.

 

Bill Bischoff covers tax and retirement issues for MarketWatch.

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