Retirement investors who are in the accumulation phase of their working lives are often concerned about maxing out their yearly individual retirement account (IRA) contributions. In the mean time, many retirees above the age 70 ½ are concerned about annual required minimum distributions (RMD). Retirement investors between ages 59 ½ and 70 ½ can coast in a sweet spot where they enjoy no RMDs.
A Traditional IRA
is a retirement tool that allows tax deductions for contributions and tax-deferred growth on investments. IRA rules allow investors nearing retirement age (50 years and older) to contribute more to their IRA plans than investors who are further away from retirement.
In order for a retirement investor to contribute to a Traditional IRA, she or he must have taxable earned income. For example, for an investor to contribute $5,500 to a Traditional IRA she or he must have made at least $5,500 in taxable earned income that year.
Whether investors are making a contribution or taking a distribution, the amounts can change annually due to inflation protections and life expectancy tables. However, in 2016, the Traditional IRA contribution limit remained the same as the 2015 contribution limits. Below are the IRA contribution limits for 2016:2016 Traditional IRA Contribution Considerations
$5,500 for those below age 50
$6,500 for those above age 50Anyone age 70 ½ and older cannot contribute to a Traditional IRA .2016 Traditional IRA Distribution Considerations
The end of the year is time when most retirement investors begin to consider their 2016 required minimum distribution (RMD) amount.
While the investment growth of a Traditional IRA is tax-deferred, withdrawals (aka distributions
) are considered ordinary income for that tax year. A required minimum distribution is calculated by the total IRA account balance and your life expectancy, or in the case of an inherited Traditional IRA, the life expectancy of whomever you inherited the IRA from. A few other IRA withdrawal considerations outside of retirement and inheritance are as follows:
As a broad rule, taking a distribution from a Traditional IRA account before age 59 ½ will result in a 10% IRS penalty. Consult your tax expert for more specifics on penalty exclusions.
The penalty for missing your 2015 RMD is 50% of the difference between the amount that should have been distributed, and the amount that was distributed.
There is no penalty for withdrawing more than your required minimum distribution.
While it may feel like 2015 is almost over, IRA contributions can be made until April 15th
of 2016. This allows anyone planning for retirement to consult with his or her tax advisor to choose the tax-advantaged plan that best fits their retirement savings plan. Contact New Direction IRA
today to speak with self-directed IRA experts and get the ball rolling for your 2015 Traditional IRA contributions!