Understanding a Traditional IRA & How Much You Can Contribute in 2019

. 3 min read

A traditional IRA, or individual retirement account, is one the best financial programs you can use to save for retirement. It is a tax-deferred account that allows you to defer paying taxes on dividends, interest, or capital gains until you withdraw. You also might be eligible to deduct the contribution amount from your taxes.

Let's look at an example that focuses on the growth in a taxable vs a tax deferred  (IRA) account. In a taxable account you invest $100,000 in a stock with an annual dividend of 5%. After one year, you will have $103,750 ($5,000 dividend - $1,250 for taxes at 25% rate). However, if the investment was placed in a traditional IRA, you would have $105,000 since you deferred the taxes. Here is where it gets interesting due to compound interest; over the course of 30 years, at the 5% dividend rate with reinvestment, you will have $301,747 in the taxable account (after paying taxes) and $432,194 in the IRA (before withdrawing and paying taxes). Once you withdraw from your IRA, you'll need to pay taxes on the total amount, ending up with $324,145, or $22,398 more in the IRA vs the taxable account.

Now that you understand the power of a traditional IRA, it is important to know the limits and requirements.

The Traditional IRA Overview

  • The IRA contribution limit for 2019 is $6,000, or $7,000 if you’re 50 or older.
  • You are able to deduct the amount from your taxes for the year the contribution was made. Please see below for eligibility requirements.
  • If you (or your spouse) earn taxable income and are under age 70 ½, you can contribute.
  • At 70 ½ you must start making withdrawals, and this amount will be included in your adjusted gross income.
  • If you are phased out of the deduction, see below, you can still contribute without the deduction and defer the taxes on the gains.

The Pros and Cons of a Traditional IRA

PROSCONS
  • There are no income limits to open and contribute to a traditional IRA
  • The tax deduction on contributions reduces your adjusted gross income whether or not you itemize deductions on your tax return
  • Tax-deferred growth means any gains you would pay taxes on in a standard brokerage account are pushed down the road
  • You can use traditional IRA money to pay for qualified college expenses without paying an early distribution penalty, although you'll pay taxes on the distribution
  • You can use up to $10,000 from a traditional IRA toward the purchase of your first home (again, you’ll owe taxes on the distribution but no penalty)
  • If you tap the money before age 59½, you’ll pay taxes and a 10% early distribution penalty, unless your withdrawal qualifies as an exception. (Here’s a full list of the traditional IRA early distribution rules.)
  • You must begin taking distributions — called required minimum distributions — at age 70½. (There are no required minimum distributions with Roth IRAs.) Also at 70½, you can no longer make contributions to the account.
  • If you're covered by a retirement plan at work, your ability to deduct IRA contributions may be reduced or eliminated at higher incomes.

data source: nerdwallet.com

Income Limits for Traditional IRA

Filing statusFull deduction if modified AGI is ... Partial deduction if modified AGI is ...No deduction if modified AGI is ...
Married filing jointly and you're covered by retirement plan at work2018: $101,000 or less
2019: $103,000 or less
2018: More than $101,000 but less than $121,000
2019: More than $103,000 but less than $123,000
2018: $121,000 or more
2019: $123,000 or more
Married filing jointly and your spouse is covered by a retirement plan at work 2018: $189,000 or less
2019: $193,000 or less
2018: More than $189,000 but less than $199,000
2019: More than $193,000 but less than $203,000
2018: $199,000 or more
2019: $203,000 or more
Single or head of household2018: $63,000 or less
2019: $64,000 or less
2018: More than $63,000 but less than $73,000
2019: More than $64,000 but less than $74,000
2018: $73,000 or more
2019: $74,000 or more
Married filing separately and you or your spouse is covered by a retirement plan at work2018: Not available
2019: Not available
2018: Less than $10,000
2019: Less than $10,000
2018: $10,000 or more
2019: $10,000 or more

data source: nerdwallet.com


Your FREE
Retirement Report

Planning or In Retirement?
Get Your Retirement Readiness Score



Preparing for retirement should create excitement, not concern. Having a solid plan is key to a successful retirement.

Our digital service takes retirement planning beyond finances so you have healthy, happy, and fulfilled retirement. Get started on your retirement plan for Free: Your Retirement Plan.


Your FREE
Retirement Report

Planning or In Retirement?
Get Your Retirement Readiness Score