IRAs can seem complicated on the surface, there are rules and regulations in place so that the IRS gets their money. These accounts are still beneficial to you and you should know the rules before you start investing.
So we've gone over The Basics: Roth = post-tax account and Traditional = pre-tax account. BUT the most important part - the IRA is only the account. Once it's opened, you still have to pick what to invest in!
IMPORTANT: IRS rules and regulations CAN and DO change, so the information in this article may become outdated. I've included links to the IRS website which will have the most up-to-date info. Or call your investment company and they'll also be able to give you the current rules.
Please please please don't get discouraged while reading this. It took me a long time for this stuff to start clicking and making sense. Seriously, I would not understand half as much as I do now if I hadn't gone through training and certification while I was with an investment company. & that training was grueling - it was studying 8am-5pm Monday-Friday for 2 months. All I'm saying is THIS STUFF IS HEAVY. This article is basically IRS rules and regulations - not fun stuff.
You know what is fun though? Being able to retire comfortably in 30-40 years, not having to work for the rest of your life, traveling to the places of your dreams. So we just gotta get through the hard stuff. And what a great life lesson - nothing worth having comes easy.
Alright, now that I'm done with my rant, as the Quiz Daddy, Quiz Khalifa, Host Malone of HQ Trivia used to say, "Let's get down to the nitty-gritty. Let's get this show on the road!"
MAGI - Modified Adjusted Gross Income
This is an important number when it comes to investing in IRAs. It basically determines if you are eligible to contribute or take deductions on your contributions. Figuring out your MAGI can be a little confusing at first, I would recommend calling whoever does your taxes and getting personal help from them. Or there are multiple resources online to calculate this number as well.
Generally speaking, the max contribution amount is $6,000 a year if you're under age 50 (as of 2019). These can get a little tricky because what you can contribute also depends on your personal situation and your MAGI. Remember, the reason you have to figure out your MAGI is to know how much you can contribute to your Roth or how much you can deduct when contributing to a Traditional IRA.
A small but important detail is that you cannot contribute more than you have earned income in a year. So let's say you're in college and only work during the summer at a part-time gig. You do the math and realize you'll only earn about $5,000. So even though the limit is $6,000, you'd only be able to contribute $5,000. So keep this small fact in mind while we go through the next few items in regards to contributions.
You can contribute the full amount to your Roth IF you are filing your taxes single AND your MAGI is below $122,000. Check all the different scenarios for Roth contributions HERE
Deductions apply only to Traditional IRAs. You cannot take a deduction for Roth contributions because it's already money that has been taxed. So, when contributing to a Traditional IRA, come tax time, you may be able to take a deduction on your taxes.
If you ARE covered by a retirement plan through your employer (whether you use it or not) AND you file single, you can deduct the full amount IF your MAGI is below $64,000. Check the IRS website for other scenarios.
If you are NOT covered by a retirement plan at work and you file single, you can deduct your full contribution no matter what your MAGI is. Check the IRS Website for other scenarios.
"K, Madison I get it. We covered some rules and that I should talk to a tax pro to make sure I know my MAGI but WHY SHOULD I HAVE AN IRA?
When you have an IRA (or any investment account) you are putting your money to work for you so that one day you don't have to work. Your money can work hard for you so that you don't have to work hard for your entire life.
Let's say you're 25 and decide today that you want to do this IRA thing (and you made sure you met all the requirements) and you start contributing $500 a month (which equals the yearly limit). Let's also say the market and the items you're invested in until age 65 produce 8% returns annually. You would have $1.7 million when you retire. ONE POINT SEVEN MILLION DOLLARS. Know what's even crazier, you would have only contributed a total of $240,000!
All you did was get intentional about where your money is going. All you did was take 20 minutes out of your life to set up an IRA account online. 20 minutes of your life today could make you a millionaire. Of course, I recommend taking time to figure out what your ideal portfolio mix should be but that's a story for another day. the most important thing here is to just start.
THIS IS YOUR TIME! It's time to step up to the plate and start doing something about your future! IRAs can be the difference between getting the retirement of your dreams or working for the rest of your life and never having the gratification of your money working FOR YOU!
P.S. My 1:1 Money Coaching Program is currently LIVE! Learn more.
DISCLAIMER: This is not financial or tax advice. Please consult a professional before making any investment or tax decisions. Returns are not guaranteed. Different investments result in different returns. Investing involves risk and possible loss of money. Information in this article may become outdated. Do your own due diligence before investing. The information contained in this article is for informational and entertainment purposes only. Read my full disclaimer HERE.