Earlier this year, we detailed the different types of Individual Retirement Accounts (IRA) available and the different strategies to consider when weighing these investments.
As we approach the middle of the year, it’s a great time to look at how you can make the most of an IRA and if it’s the most appropriate strategy for you to reach your financial goals.
There are several different kinds of IRAs including: Traditional IRA, Roth IRA, and SEP IRA. For individuals, Traditional and Roth IRAs are available to include in your financial plan. SEP IRAs are available for self-employed individuals or small businesses.
In this blog, we will be reviewing the new Traditional and Roth IRA 2024 contribution limits, deadlines, and changes from the IRS, as well as SEP IRAs. As a review, Traditional and Roth IRAs are similar as they are both personal savings plans that offer tax advantages; however, they differ in how they are taxed and how you can withdraw funds. The SEP IRA is a retirement plan for self-employed individuals, and small businesses and their employees.
For a quick refresher:
- Traditional IRA – Contributions to a traditional IRA are made on a pre-tax basis and may be tax deductible depending on your income and eligibility limits. This means you can deduct the amount you contributed to your traditional IRA from your taxable income for the year. This is a great option for individuals with a higher income, as this deduction may be enough to push you into a lower tax bracket. Keep in mind, when you withdraw funds from a traditional IRA, they will be taxed as income the year you make the withdrawal, including any gains. In addition, the age at which you are allowed to make a withdrawal without a penalty is 59 ½.
- Roth IRA – Contributions to a Roth IRA are made after-tax and are not tax deductible; however, qualified withdrawals may be tax-free on both the contribution and the gains, and they offer more flexibility for withdrawals. This is an excellent option for younger investors with a lower income as they are being taxed at a lower rate. A major benefit of a Roth IRA is that withdrawals will be tax free on both the contribution and gains as long as you are 59 ½ and the account has been open for five years at the time of the withdrawal. In addition, with a Roth IRA, you can withdraw your contributions at any time (but not the gains) without taxes or penalties.
- SEP IRA – A SEP IRA is designed for self-employed individuals or small business owners and allows the employer to contribute up to 25% of employee compensation up to a max. For businesses, a SEP IRA offers flexible annual contributions as long as the employer contributes to all employees equally. This is a good option to consider if a business’s cash flow varies throughout the year. In addition, it opens large tax deduction opportunities (up to $69,000) for business owners to consider.
What's New for 2024 and Maximizing Your IRA Benefits
For 2024, the IRS issued new contribution limits, deduction limits, and deadlines to keep in mind.
- The IRA contribution limit has increased to $7,000 from $6,500 (or $8,000 for individuals age 50 or older from $7,500) for 2024.
- The deadline to make your IRA contributions for 2024 is April 15, 2025.
- If you are covered by a retirement plan at work, your tax deduction will be reduced for contributions to a traditional IRA if your modified adjusted gross income (AGI) is:
- More than $123,000 but less than $143,000 for a married couple filing a joint return or a qualifying surviving spouse,
- More than $77,000 but less than $87,000 for a single individual or head of household, or
- Less than $10,000 for a married individual filing a separate return.
- If you are married and your spouse is covered by a retirement plan from work and you are not, your tax deduction will be reduced if your modified AGI is more than $230,000 (up from $218,000 for 2023) but less than $240,000 (up from $228,000 for 2023). If your modified AGI is $240,000 or more, you can’t take a deduction for contributions to a traditional IRA.
- Your Roth IRA contribution limit is reduced in the following situations:
- Your filing status is married filing jointly or qualifying surviving spouse and your modified AGI is at least $230,000. You can’t make a Roth IRA contribution if your modified AGI is $240,000 or more.
- Your filing status is single, head of household, or married filing separately and you didn’t live with your spouse at any time in 2024 and your modified AGI is at least $146,000. You can’t make a Roth IRA contribution if your modified AGI is $161,000 or more.
- Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than zero. You can’t make a Roth IRA contribution if your modified AGI is $10,000 or more.
If an IRA is a part of your financial plan, here are some important things to consider making the most of it:
- Time is on your side. Contributing earlier in the year will give your IRA more time to compound. The more you’re able to do this, the more compounding interest you’ll be able to harness within your IRA.
- Name a beneficiary. Adding a beneficiary to your IRA will reduce potential probate fees and will keep the funds safe from creditors.
- Don’t wait until Tax Day to fully fund your IRA. If cashflow allows, it’s best to fully fund your IRA as early as you can. This gives more opportunity for market appreciation. However, if it is more feasible to contribute monthly rather than all at one time, that is still a great strategy to use throughout the year. Again, this way your IRA will have more opportunities to be invested during low points in the market to make the most of your contributions.
Overall, it is important to know your long-term financial goals and work with an advisor to determine the most appropriate strategy for you. Reach out to the wealth management team at Couto DeFranco to discuss your current plans and how to optimize them for your goals today.
Investments are subject to market risks including the potential loss of principal invested. Asset allocation does not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets. Both qualified retirement plans and IRAs typically involve fees, expenses, and services that should be compared when considering a qualified plan rollover.