Brush up on your IRA facts
If you are opening an individual retirement account (IRA) for the first time or need a refresher course on the specifics of IRA ownership, here are some facts for your consideration.
IRAs in America
IRAs continue to play a prominent role in the retirement saving strategies of Americans. According to recent research, over 60 million taxpayers own IRAs.1
Contributions and Deductibility
Contribution limits. In general, the most you can contribute to an IRA for 2022 is $6,000. However, if you are age 50 or older, you can make an additional "catch-up" contribution of $1,000, which brings the maximum annual contribution to $7,000.
Eligibility. One potential area of confusion around IRAs concerns an individual's eligibility to make contributions. In general, tax rules require that you must have compensation to contribute to an IRA. Compensation includes income from wages and salaries and net self-employment income. If you are married and file a joint tax return, only one spouse needs to have the required compensation.
With regard to Roth IRAs, income may affect your ability to contribute. For tax year 2022, individuals with an adjusted gross income (AGI) of $129,000 or less may make a full contribution to a Roth IRA. Married couples filing jointly with an AGI of $204,000 or less may also contribute fully for the year. Contribution limits begin to decline, or "phase out," for individuals with AGIs between $129,000 and $144,000 and for married couples with AGIs between $204,000 and $214,000. If your income exceeds these upper thresholds, you may not contribute to a Roth IRA.2
Deductibility. Whether you can deduct your traditional IRA contribution depends on your income level, marital status, and coverage by an employer-sponsored retirement plan. For instance:2
- If you are single and covered by an employer-sponsored retirement plan, your traditional IRA contribution for 2022 will be fully deductible if your AGI was $68,000 or less. The amount you can deduct begins to decline if your AGI was between $68,000 and $78,000. Your IRA contribution is not deductible if your income is equal to or more than $78,000.
- If you are married, filing jointly, and the spouse making the IRA contribution is covered by an employer-sponsored retirement plan, your 2022 IRA contribution will be fully deductible if your combined AGI is $109,000 or less. The amount you can deduct begins to phase out if your combined AGI is between $109,000 and $129,000. You may not claim an IRA deduction if your combined income is equal to or more than $129,000.
- If you are married, filing jointly, and your spouse is covered by an employer-sponsored plan (but you are not), you may qualify for a full IRA deduction if your combined AGI is $204,000 or less. The amount you can deduct begins to phase out for combined incomes of between $204,000 and $214,000. Your deduction is eliminated if your AGI on a joint return is $214,000 or more.
- If neither you nor your spouse is covered by an employer-sponsored retirement plan, your contribution is generally fully deductible up to the annual contribution limit or 100% of your compensation, whichever is less.
Keep in mind that contributions to a Roth IRA are not tax deductible under any circumstances.
Distributions
You may begin withdrawing money from a traditional IRA without penalty after age 59½. Generally, previously untaxed contributions and earnings are taxable at the then-current regular income tax rate. Nondeductible contributions are generally not taxable because those amounts have already been taxed.
You must begin receiving minimum annual distributions from your traditional IRA once you reach age 72 and then annually thereafter. If your distributions in any year after you reach 72 are less than the required minimum, you may be subject to an additional federal tax equal to 50% of the difference.
Unlike traditional IRAs, Roth IRAs do not require the account holder to take distributions during his or her lifetime. This feature can prove very attractive to those individuals who would like to use the Roth IRA as an estate planning tool.
Important Note: Equitable believes that education is a key step toward addressing your financial goals, and this discussion serves simply as an informational and educational resource. It does not constitute investment advice, nor does it make a direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Your unique needs, goals and circumstances require the individualized attention of your financial professional. Asset allocation and rebalancing do not guarantee a profit or protection against investment loss.
Source/Disclaimer:
1Tax Policy Center, Urban Institute & Brookings Institution, Briefing Book, 2021.
2Internal Revenue Service.
This communication is not intended as investment and/or tax advice and should not be treated as such. Each individual's situation is different. You should contact your financial professional to discuss your personal situation.
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