IRA offers unique savings for retirement. Whether you opt for traditional IRA, Roth IRA, or both, these accounts will come in handy in the future. With Traditional IRA, you will need to pay your income taxes once you start withdrawals. However, with Roth IRA, you pay taxes as you contribute. Whether you own a traditional IRA or Roth IRA, your contributions are guaranteed before or after retirement.
You may be familiar with the IRA rules, but its time you check what is in store for you in 2021. Read more on the 2021 IRA rules.
1. Maximum Contributions Are $6k For Under 50
The same rule that applied in 2019 and 2020 about maximum contribution under 50 remains unchanged in 2021. Your maximum contribution for 2021 is $6000 for both traditional IRA and Roth IRA. You can also hold the two accounts but always ensure the amount in the two accounts does not exceed $6000 when summed up.
2. An Extra $1000 For Persons Above 50
If you are above 50, you are not limited to $6000. Instead, you can make an extra contribution of $1000 to make the maximum $7000.
3. No Contributions For These High Incomes
If you are single or married but filing your contributions separately, you are not eligible to make contributions if your 2021 income is over $140,000. Also, the limit for qualifying widowers and married couples should be less than $208k. Any income above this becomes ineligible.
4. Good News! There Is a Backdoor IRA
Do you feel limited by the above rule? You can use the backdoor Roth IRA. Here, you contribute your funds to Traditional IRA then later change it to Roth IRA. Since Traditional IRA reduces tax income, you may find yourself with serious taxes as time goes. Therefore, before signing up for a backdoor IRA, consult your financial planner.
5. Too Much Contribution Results in a Penalty
As previously stated, the maximum contribution for persons under 50 is $6k while those over 50 are $7k respectively. What happens when you contribute more than your limit? A 6% penalty applies for each year that money sits in your account.
6. Unlimited Access to Your Money
With Roth IRA, you can access your contribution anytime. Since your money is already taxed, you can withdraw it in case of an emergency.
7. Withdraw Your Earnings Before 59½: Get Penalized
Contributors below 59½ can access their contributions at any time but that does not apply to earnings. When you withdraw your earnings, you will pay income taxes and a 10% penalty.
8. An Exception on Penalty
Here is the good news. If you are below 59½ years and have had the account open for 5years and more, you are exempted from paying the income taxes as well as the 10%penalty.
The exception also applies when the money withdrawn is used to finance bills when unemployed especially during this pandemic time or to settle medical insurance premiums. Moreover, in the case of death or disability, IRA exempts the taxes.
9. Contributions Do Not Need To Stop At 72
If you own a traditional IRA account, you are required to make contributions once you are 72. However, if you have a consistent taxable income, you can contribute to Roth IRA. This includes your wages, salary, and tips.
10. No Need to Withdraw Money
When you are 72, a traditional IRA requires you to start making withdrawals. With Roth IRA, you can continue making contributions without the need to make withdrawals. You can also pass on the tax-free money to your heirs when you die.
IRA is looking out for you in the year 2021. Both traditional IRA and Roth IRA will ensure you have a healthy retirement fund when that comes! Contact us for alternatives to Wall Street such as building tax-free wealth. Wishing you a prosperous 2021!