IRAs: What They Are
- All traditional IRAs are tax deferred. That means you owe no tax on your earnings until you withdraw. If you qualify, you may also be able to deduct your contribution on your federal income tax return, deferring tax on that amount as well.
- Roth IRAs are tax free if your account has been open at least five years and you're at least 59½ when you withdraw. That means you owe no tax at all on your earnings as they accumulate or when you withdraw.
The only requirement for opening an IRA is having earned income - money you get for work you do. Your total annual contribution is limited to $6,000 in 2021, whether you put it all in one account or divide it between a traditional IRA and a Roth. Any amount you earn qualifies, and you can contribute as much as you want, up to the annual cap. But you can't contribute more than you earn. For example, if you earn $1,800 in a year, that's how much you can put in. And whether you earn $6,000 or $350,000, the top limit is the same. If you're 50 or older, you can also contribute an additional catch-up contribution of $1,000 each year.
If your husband or wife doesn't work, but you do, you can contribute up to $6,000 in 2021 to a separate spousal account in your spouse's name. The advantage for the nonworking partner is being able to build an individual retirement fund.
WHICH IRA FOR YOU?
If you're 50 or older, you can make catch-up contributions to your IRA each year. In 2021, you can add an extra $1,000 a year to your account, on top of the standard contribution cap for the year. You're eligible whether or not you've contributed the maximum in earlier years.
IT'S YOUR ACCOUNT
WHEN TO CONTRIBUTE
You have until April 15 — the day tax returns are due—to open an IRA and make the deposit for the previous tax year.You can put money into your IRA in a lump sum, or spread your contribution out over up to 15 months. You may put in the whole amount the first day you can, January 2 of the tax year you're making the contribution for. Or, if you're like most people, you're more apt to make the deposit on the last possible day. The most practical solution may be weekly or monthly contributions through payroll deductions. There are no guarantees when you invest this way, any more than there are when you invest a lump sum. You could lose money, especially in the short term. But if your investments do well, adding to them regularly can give your IRA value a real boost.