Tuesday April 17,2018: the last day that we can file our income taxes on our 2017 individual earnings. That is, of course, without filing an extension. We also have from now until that day to make our contributions into an Individual Retirement Account. Many are asking whether the new tax law is going to affect what type of retirement account they should be using. In short, it is very much dependent upon the individual’s situation and goals; but, it is also a function of their household income level and whether they are being covered by an employer-sponsored qualified plan.
For 2017, the limits on contributions are the same for both Roth and Traditional IRAs. We are able to put a total of $5,500 into either, and if over the age of 50, there is an extra $1,000 “catch up” provision that allows for total contributions of $6,500.
Choosing between contributing to a Traditional IRA and a Roth IRA can be a daunting task, but here are some guidelines as to the tax deductibility of the Traditional IRA which may help in the process.
If you are a single filer and covered by an employer-sponsored plan, you can deduct the full amount of your contributions into your Traditional IRA If your income is less than $62,000. This deductibility will phase out if you earn between $62,000 and $72,000; the deduction is completely phased out for you if your income exceeds $72,000.
If you file taxes jointly or with married status, the income levels for deductibility are slightly higher if covered by an employer plan. You would have total deductibility of your IRA contribution if your household income is below $99,000 and it is gradually phased out for incomes between $99,000 and $119,000.
If your employer does not offer a 401k plan, then there are no income limits as to the deductibility of your Traditional IRA contributions. In terms of your income, the sky is the limit.
As for the Roth IRA, your contributions are never tax deductible, as the growth inside of the Roth IRA could be completely tax-free for future qualified distributions. Distributions could be subject to taxation if they are held less than five years or withdraw before age 59.5. There are though, income limits that may prohibit you from contributing. As a single filer, your income needs to be below $118,000 to contribute the full amount into your Roth IRA, and it phases out between that level and $133,000. For households filing married or jointly, the income limitations start at $186,000 and the full contribution amount phases out again between $186,000 and $196,000.
One other thing to consider is that in 2018, there is the possibility that your income tax bracket could be lower due to the new tax laws. You may be able to make a tax-deductible contribution for 2017 into a Traditional IRA when your tax bracket is higher, and then make Roth contributions going forward for the next eight years if you are in a lower tax bracket. You may also want to work with your tax advisor to determine whether it could be of value to you to start converting your Traditional IRA into a Roth IRA over the next eight years while this tax law is in place.*
If the Trump Economic Plan doesn’t work out like he hopes it will, and we just end up adding a lot to our national debt, we very well could have much higher tax rates in the future to pay for all these current tax cuts, the military spending, and proposed infrastructure bill. In that case, your Roth IRA qualified distributions could come in very handy.