I was introduced to the IRA when I was in college. My finance professor used an illustration of twin brothers most advisors have seen in some form. The first brother started saving $2,000 per year into an IRA at age 20 and stopped 10 years later. His brother waited ten years to start at age 30 and saved $2,000 every year up to age 65. Thanks to the magic of compounding, the brother who started early had more money when they turned 65 despite contributing $50,000 less.
That illustration is a classic in personal finance and it made an impression on me. However, it didn’t change my savings habits. I recall, quite clearly, thinking, “Who has two grand?”
That experience popped back into my head when I read that the Investment Company Institute (ICI) estimated that roughly 88 percent of all eligible taxpayers skipped IRA contributions in 2013. Most Americans are not saving for retirement, and I have no reason to doubt the ICI, but 88 percent is a huge number. Then again, IRAs can be confusing.
To a degree, tax season is IRA season. So, I thought I would run down some common misconceptions about IRAs and a few other things to look for this IRA season.
“I can’t contribute to an IRA.” It seems like every year we take on new clients that could have contributed to an IRA but didn’t because they simply didn’t know that was an option for them.
Anyone younger than 70 ½ with earned income or with a spouse with earned income can contribute to an IRA—Roth or traditional.
Workers older than 70 ½ can only contribute to a Roth IRA, and if their modified adjusted gross income (MAGI) is below IRS limits—For 2017, $133,000 if filing as a single and $196,000 for joint filers.
“I don’t have $5,500 for an IRA.” $5,500 (or $6,500 if 50 or older) is a maximum not a requirement. Lower contribution amounts are acceptable.
“I didn’t put anything in last year so maybe I will this year.” Frequently, people think the contribution deadline is December 31st, but it is actually the tax-filing deadline—April 18, 2017 for 2016.
“I can’t deduct it, so why bother?” Many people decline to contribute if there is no deduction, and we spot a few every year that are wrong about their eligibility to deduct a contribution.