Why Beating the 2018 IRA Deadline Makes Sense

Even though tax filing season is well under way, there's still time to make IRA contributions for 2018.

You can potentially make a combined maximum contribution of up to $5,500 across all of your Traditional and Roth IRA accounts ($6,500 if you were age 50 or older on December 31, 2018).

For most taxpayers, the contribution deadline for 2018 is April 15, 2019 (April 17 for taxpayers who live in Maine or Massachusetts).

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don't exceed the annual limit (or, if less, 100% of your earned income). You may also be able to contribute to an IRA for your spouse for 2018, even if your spouse didn't have any 2018 income.

Roth IRAs

If you’re able to open and contribute to a Roth IRA, doing it before your tax filing deadline is a smart idea.

Why? Because Roth IRA assets must be held for five years before they can be withdrawn tax-free at age 59½ or older. If you open a Roth IRA in 2019 before the tax deadline, your five-year holding period will be dated to start on January 1, 2018—earning you a full year for a contribution made a year later!

Keep in mind that the higher your modified adjusted gross income (MAGI) is, the lower your maximum contributions may be.  Above a certain level of MAGI you won't be able to contribute at all. These limits are summarized below.

2018 income phaseout ranges for determining eligibility to contribute to a Roth IRA:

If you are:

Your ability to contribute to a Roth IRA is reduced if your MAGI is:

Your ability to contribute to a Roth IRA is eliminated if your MAGI is:

Single/Head of household

$120,000 to $135,000

$135,000 or more

Married filing jointly

$189,000 to $199,000

$199,000 or more

Married filing separately

$0 to $10,000

$10,000 or more

 

Note that unlike Traditional IRAs, you can continue to contribute to a Roth IRA after you’ve turned 70½.

 

Traditional IRA

You can contribute to a traditional IRA for 2018 if you had taxable compensation and you were not age 70½ by December 31, 2018. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2018, then your ability to deduct your contributions may be limited or eliminated, depending on your filing status and modified adjusted gross income (MAGI).

2018 income phaseout ranges for determining deductibility of Traditional IRA contributions:

If you are:     

1. Covered by an employer-sponsored plan and filing as:

Your IRA deduction is reduced if your MAGI is:

Your IRA deduction is eliminated if your MAGI is:

Single/Head of household

$63,000 to $73,000

$73,000 or more

Married filing jointly

$101,000 to $121,000

$121,000 or more

Married filing separately

$0 to $10,000

$10,000 or more

2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan

$189,000 to $199,000

$199,000 or more

 

Even if you can't make a deductible contribution to a traditional IRA, you can always make a nondeductible (after-tax) contribution, regardless of your income level.

However, if you're eligible to contribute to a Roth IRA, in most cases you'll be better off making after-tax contributions to a Roth since you won’t be required to take annual distributions. And you’ll pay no taxes on earnings if you withdraw them at age 70½ or later and meet the five-year holding requirements.

401(k) or IRA or both?

If you have a 401(k) plan at work and it offers matching contributions it’s usually better to contribute as much as possible on a pre-tax basis through your plan before making additional contributions to a Traditional IRA.

If you’d like greater flexibility in how you invest and use retirement assets, consider making additional eligible contributions to a Roth IRA. That way your retirement nest egg will be split among assets you’ll have to start withdrawing at age 70½ (Traditional IRAs and 401(k) plans) and those that can remain invested and grow tax-free as long as you want (Roth IRAs). If you need help figuring out how to align with your retirement contributions with your future retirement needs, a financial advisor can help make it all make sense. 

 

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Chris Gullotti is a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]

 

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances.