Those Looking to Boost Their Savings during National Retirement Planning Week® Should Consider an IRA

Even if you already contribute to a 401(k) or other workplace retirement plan, consider making contributions to an individual retirement account, or IRA.

Every individual with earned income who has not reached age 70½ can contribute to a traditional IRA. There is no age limit for an individual with earned income to contribute to a Roth IRA.

For 2015, your total contributions cannot be more than $5,500 – or $6,500 if you're age 50 or older. This limit doesn't apply to rollover contributions and the qualified contributions made by U.S. military reservists who were ordered or called to active duty after Sept. 11, 2001.
The benefits:

  • Making contributions to an IRA in addition to a 401(k) helps you save even more for retirement.
  • Your traditional IRA contributions may be tax deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your modified adjusted gross income exceeds certain levels–for 2014, $60,000 to $70,000 for individuals and $96,000 to $116,000 for couples. For individuals who don't have a workplace retirement plan but are married to someone who does, the tax deduction for an IRA contribution is phased out if the couple's income was between $181,000 and $191,000 in 2014. The 2014 income limits for contributing to a Roth IRA are between $114,000 and $129,000 for individuals and $181,000 to $191,000 for married couples. These Roth income limits increase by $2,000 for 2015.
  • Even if your contributions aren't tax deductible, contributing to an IRA can be a powerful way to add to retirement savings on a tax-favored basis because the earnings are tax-deferred–that is, you won't pay tax until you make a withdrawal later.
  • If you are not eligible to make tax-deductible contributions, or if you have determined that it is better to forgo the benefit of the tax deduction, a contribution to a Roth IRA can yield future tax benefits. For example, if certain requirements are met, withdrawals from a Roth IRA are income tax free.
  • If you're interested in using a Roth IRA as a savings vehicle, but are prevented from doing so directly because of income limits, funding a traditional IRA offers an indirect path to funding a Roth IRA. Once you fund a traditional IRA, you can immediately convert it to a Roth. There are no income limits on Roth conversions and, assuming this is your only IRA, there should be little or no income tax due upon conversion because there should be little or no gain on the assets.
Of course, because individual circumstances are unique, it's always a good idea to consult with your tax and legal advisors before making any decisions regarding IRAs and other savings and tax-favored vehicles.
Tax information is provided by Robert Fishbein, vice president and corporate counsel, Prudential Financial, who is a tax attorney and frequent speaker and author on tax-wise retirement planning strategies, including maximizing retirement income through Social Security elections and tax diversification. Looking for more content from Robert? Read "Life-Cycle Financial Planning."