Tax Tip #2: Contribute to an IRA or to a Roth IRA
In 2014, you can contribute $5,500 to an IRA or Roth IRA and $6,500 to either if you are age 50 or older. These contribution limits are unchanged from 2013, but there are a few changes you should know about concerning income limits. This is one area where the IRS really punishes success, and that is a shame.
In 2013, if you earn $59,000 and have a 401k or similar workplace retirement plan, your IRA contribution tax deduction starts to get phased out, and at $69,000 it gets eliminated altogether. In 2014, these amounts get raised to $60,000 to $70,000, respectively, but this means that plenty of Americans are still denied a fantastic tax break due to their earnings “too much money.”
If you don’t have a workplace retirement plan but your spouse does, you still can contribute to an IRA and get a tax break. But it starts to get phased out $178,000 in combined income for the couple and is eliminated altogether at $188,000. In 2014 these limits get raised to $181,000 and $191,000, respectively.
Roth IRAs are also getting higher income cutoffs in 2014. The AGI phase-out range for Roth IRA contributions will be $114,000 to $129,000 for individuals and $181,000 to $191,000 for married couples — that’s up from $112,000 to $127,000 and $178,000 to $188,000, respectively, in 2013.
If you qualify for a Roth contribution, do it. The Roth IRA is the best retirement vehicle ever created in this country. But if you don’t qualify for a Roth, a traditional IRA still is worth considering, even if you have a 401k at work and you’re disqualified from the current-year tax deduction. You still benefit from tax-free compounding of capital gains, dividends and interest, and you also enjoy the lawsuit protection and estate planning benefits of an IRA.