Providing answers on IRAs is an “if this then that” proposition because the answers frequently depend on your age, income, marital status and more. Therefore, you won’t want to buy, contribute to, or withdraw from an IRA without doing some serious research—or talking to a financial planner or tax advisor. That said, we can certainly point you in the right direction when it comes to your top questions about Individual Retirement Accounts. Take a look at the five most popular topics.
How much can I contribute to my IRA?
The short answer is that the contribution limit is $5,500 for 2014 and 2015. The long answer is that there are plenty of exceptions—based on your age, marital status, employment, income, other retirement accounts, and the type of IRA you have.
The primary exception is that if you’re 50 or older, you can stash away an additional $1,000. This is referred to as a “catch-up contribution” and it is intended to help older adults save more. If you don’t think that makes a difference, consider this fact from investment website The Motley Fool: “If you start investing the full amount allowed when you turn 50, and then retire at 65, that extra $1,000 per year could mean an extra $28,000 in retirement savings, given 7% average annual investment returns.”
What if I didn’t contribute that much last year?
Unlike just about everything related to taxes, tax-deductible IRA contributions are not confined to the calendar year. Yes, there’s a big exception: You can contribute up to your IRA limit by April 15 of the following year. So, you can contribute your maximum IRA amount by April 15, 2015, and still have it affect your 2014 taxable income. For details, see Kiplinger’s “Fund an IRA, Cut Your Taxes.”
When can I get the money out?
First, you need to know whether you have a traditional IRA or a Roth IRA. The primary difference is when you pay the taxes: With a traditional IRA, you pay taxes when you withdraw from it; with a Roth IRA, you pay taxes on the money before you invest it. Once you know the type of IRA you have, you’ll know when you can access money.
- Traditional IRA: You can get money out of a traditional IRA starting at age 59-1/2—and you must starting taking a required minimum distribution at age 70-1/2. Because a traditional IRA is funded with pretax income, you will be taxed on the money when withdraw it. (Ideally, you have retired and are in a lower income tax bracket.) If you do need money out of your IRA before that, you can pay a 10% penalty along with the income tax.
- Roth IRA: You can withdraw the money you contributed to a Roth IRA at any time. However, you cannot access any earnings (investment gains) until you’ve had the Roth IRA for five years and you are age 59-1/2. As you might guess, there are exceptions, as Bank Rate explains in “6 Advantages of Roth IRAs.”
What if I need the money—now?
It depends on your definition of need.
As mentioned, with a Roth IRA, you can withdraw your contributions at any time. With a traditional IRA, you can always withdraw money—you’ll just have to pay a 10% early withdrawal penalty along with any income taxes on the money.
Are there exceptions? Well, of course, and they are based on need. If you need the money to pay for college, medical expenses, a first-time home, or sudden disability, you may be able to avoid the penalty. See CNN’s “When are IRA withdrawals penalty-free” for details.
Can I borrow from my IRA?
Any other questions?
If you’re still asking yourself questions—Who is Roth? What if I get divorced? What is a rollover?—head over to IRS.gov for more information.
While IRAs can be a bit complicated up-front, they can help you have an easy retirement.
Disclaimer: We try to keep information accurate and up to date, however we cannot make warranties regarding the accuracy of our information.