What's New at
AmeriChoice?

Tax season is upon us.

And lowering your taxable income is a savvy approach as you prepare for filing your return.

But as with everything for your taxes, there are guidelines, details, and limits you need to know.

Two Types

There are two types of Individual Retirement Accounts: Traditional and Roth.

A traditional IRA involves contributions that are not taxed as income, and those contributions are tax deductible for the year they were deposited. When money is withdrawn in retirement, both contributions made and earnings are taxed as income.

A Roth IRA involves contributions that are taxed as regular income, but they are not tax deductible. When money is withdrawn in retirement, neither the contributions or the earnings are taxed.

Contributions

There are no requirements to contribute to a traditional IRA, other than someone earning income who is younger than 70.5 years old.

A Roth, however, has income limits. A single filer must have a modified adjusted gross income of less than $135,000 to contribute to a Roth IRA. A married person filing jointly must have modified adjusted gross incomes of less than $199,000 to contribute to a Roth IRA. There’s a grey area, too. Phaseout of being able to contribute the maximum amount starts at $120,000 for a single filer, and $189,000 for a married couple filing jointly.

Put another way – if a single filer makes $120,000 or less, he or she can contribute the maximum amount annually. If a single filer makes between $120,001 and $135,000, they can contribute an adjusted amount. And if a single filer is making an adjusted gross income of $135,000 they cannot contribute at all to a Roth IRA.

Maximum contributions for 2018 into either type of IRA is $5,5000. If the taxpayer is older than 50, the maximum is $6,500. (These amounts have increased for next year’s tax filings, in 2019.)

Deductions

Traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make contributions. For the 2018 tax year, contributions can be made up until April 15, 2019.

The deduction is capped, however. If you have a retirement plan at work, you can make a full deduction up to the amount of your contribution limit if you earned less than $63,000 modified adjusted gross income. You can deduct a partial amount if you earned between $63,000 and $73,000 in adjusted gross income. You cannot deduct anything if your modified adjusted gross income is more than $73,000. These are all for a single filer. If you are married filing jointly, the full deduction amount is $101,000 or less of modified adjusted gross income. If your income is more than $101,000 and less than $121,000, you can deduction a partial amount of your contributions. And if you make more than $121,000 in adjusted gross income, you cannot claim any deductions (if you have a work retirement plan).

If you are not covered by a retirement plan at work, the amounts are different. If you are single filer, you can take the full deduction no matter your income. If you are married filing jointly and your spouse does not have a retirement plan at work, you can take the full deduction no matter your income. However, if you are married filing jointly and your spouse does have a retirement plan at work, you can claim a full deduction if the adjusted gross income is $189,000 or less. If your adjusted gross income is more than $189,000 but less than $199,000, you can claim a partial deduction. But if you earn a modified adjusted gross income of more than $199,000, you cannot claim a deduction from Traditional IRA contributions.

Benefits

A Traditional IRA generally lowers your taxable income in the contribution year, which lowers your adjusted gross income. The IRS considers the Traditional IRA deduction as separate from a standard or itemized deduction, an “inline” deduction.

A Roth IRA may provide more non-taxable income in the future, since neither the withdrawals or earnings are taxed. But it won’t provide you a tax break for this year’s tax filing.

Forms

A traditional IRA deduction is reported on form 1040 or Form 1040A. Roth contributions will not appear on your tax return.

Whew! That’s a lot of details about IRAs. It’s complex, but worthwhile to understand to make sure you’re getting the maximum value for your dollars.

If you haven’t maxed out your IRA’s contribution yet this year, it can definitely benefit you, whether now or in the future.  If you’re looking for the right type of account for you, check out our IRA products, and you can make sure you’re set up well for the future. Contact us today!