Taking advantage of a retirement plan at work and an IRA is a smart way to cut taxes and save more money for the future. But having multiple accounts can change the rules. Laura answers a listener question and explains how to avoid pitfalls so you leverage multiple accounts to reach your retirement goals.
Keeping different types of contributions separate helps prevent any confusion about which funds have already been taxed and which haven’t. If you or your custodian don’t keep it straight, you could end up paying tax on the same funds for a second time in retirement.
Understand Who Qualifies for a Roth IRA
If Justin’s income is too high to qualify for a deductible, traditional IRA and he doesn’t like the idea of making a non-deductible contribution, he should consider a Roth IRA instead. But as I previously mentioned, your income determines whether you qualify for a Roth IRA.
Here are the income limits that prevent you from contributing to a Roth IRA for 2017:
- Single taxpayers can’t contribute when MAGI is at or above $133,000.
- Married taxpayers who file a joint return can’t contribute when household MAGI is $196,000 or higher.
- Married taxpayers who file separate returns can’t contribute when MAGI is $10,000 or higher.
If Justin’s income is above these limits, his only retirement account option would be to max out a traditional IRA with non-deductible contributions. However, if he has business income, he may qualify for a retirement account for the self-employed, such as a SEP-IRA that allows contributions up to $53,000 or 25% of earnings, whichever is less.
Assuming Justin doesn’t have any self-employment income his best bet is to first max out a Roth IRA if he’s eligible, and if not, go with a non-deductible IRA.
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