Keeping up with your IRA: Tax season checklist
If you're one of the millions of American households who owns either a traditional individual retirement account (IRA) or a Roth IRA, then the onset of tax season should serve as a reminder to review your retirement savings strategies and make any changes that could enhance your prospects for long-term financial security. It's also a good time to start an IRA if you don't already have one. Tax laws allow you to contribute to an IRA up to April 15, 2025, for the 2024 tax year (April 15, 2024, for the 2023 tax year).
This checklist will provide you with information to help you make informed decisions and implement a long-term retirement income strategy. You should consult your legal and/or tax advisors before making any financial decisions.
Which account: Roth IRA or traditional IRA?
There are two types of IRAs available: the traditional IRA and the Roth IRA. The primary difference between them is the tax treatment of contributions and distributions (withdrawals). Traditional IRAs may allow a tax deduction based on the amount of a contribution, depending on your modified adjusted gross income as shown in the table below. Any account earnings compound on a tax-deferred basis, and distributions are taxable at the time of withdrawal at then-current income tax rates.Footnote 1 Roth IRAs do not allow a deduction for contributions, but taxes are paid at the time the contributions are made and account earnings are generally free of federal income tax as long as you take a qualified distribution. The ability to participate in a Roth IRA is available to individuals who have a modified adjusted gross income below certain levels as noted in the table below.Footnote 2
In choosing between a traditional and a Roth IRA, you should weigh the immediate tax benefits of a potential tax deduction this year against the benefits of tax-deferred or tax-free distributions in retirement.
If you need the immediate deduction this year — and if you qualify for it — then you may wish to opt for a traditional IRA. If you don't qualify for the deduction, consider funding a Roth IRA if you are eligible.
Case in point: Your ability to deduct traditional IRA contributions may be limited not only by your modified adjusted gross income, but by your or your spouse's participation in an employer-sponsored retirement plan. (See callout box below) If that's the case, a Roth IRA may be the better solution if you are eligible.
On the other hand, if you expect your tax bracket to drop significantly after retirement, you may potentially benefit from making contributions to a traditional IRA if you qualify for the deduction. You could claim an immediate deduction now and pay taxes at the potentially lower rate later. Nonetheless, if your anticipated holding period is long, a Roth IRA might still make more sense if you are eligible. That's because a prolonged period of tax-free compounded earnings could potentially make up for the lack of a current-year deduction.
Traditional IRA deductible contribution phase-outs
Your ability to deduct contributions to a traditional IRA is affected by whether you are active participant in a qualified workplace retirement plan.
If you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross income (MAGI) is:
- Between $123,000 and $143,000 for a married couple filing a joint return for the 2024 tax year.Footnote 3
- Between $77,000 and $87,000 for a single individual or head of household for the 2024 tax year.
If you are not an active participant in a retirement plan at work but your spouse is an active participant in a retirement plan at work, your 2024 deduction for contributions to a traditional IRA will be reduced if your MAGI is between $230,000 and $240,000.
If your MAGI is higher than the phase-out ceilings listed above for your filing status, you cannot claim the deduction.
Roth IRA contribution phase-outs
Your ability to contribute to a Roth IRA is affected by your MAGI. Contributions to a Roth IRA will be phased out if your MAGI is:
- Between $230,000 and $240,000 for a married couple filing a joint return for the 2024 tax year.Footnote 3
- Between $146,000 and $161,000 for a single individual or head of household for the 2024 tax year.
If your MAGI is higher than the phase-out ceilings listed above for your filing status, you cannot make a contribution.
Should you convert to Roth?
Tax laws allow you to convert — or change the designation of — a traditional IRA to a Roth IRA, regardless of your income level. As part of the conversion, you must pay taxes on any investment growth in — and on the amount of any deductible contributions previously made to — the traditional IRA. The withdrawal from your traditional IRA will not affect your eligibility for a Roth IRA or trigger the 10% additional federal tax normally imposed on early withdrawals.
The decision to convert or not ultimately depends on your timing, tax status, and personal financial circumstances. If you are near retirement and find yourself in the top income tax bracket this year, now may not be the time to convert. On the other hand, if your modified adjusted gross income is unusually low, you have sufficient money outside your traditional IRA to pay the taxes on the converted amount, and you still have many years to retirement, you may want to convert.
Maximize contributions
If possible, try to contribute the maximum amount allowed by the tax laws: $7,000 annually per individual, plus an additional $1,000 annually for those age 50 and older for the 2024 tax year. Those limits are per individual, not per IRA.
Of course, not everyone can afford to contribute the maximum to an IRA, especially if they're also contributing to an employer-sponsored retirement plan. If your workplace retirement plan offers an employer's matching contribution, that additional money may be more valuable than the amount of your deduction. As a result, it might make sense to maximize plan contributions first and then try to maximize IRA contributions.
Review distribution strategies
If you're ready to start making withdrawals from an IRA, you'll need to choose the distribution strategy to use: a lump-sum distribution or periodic distributions. If you have a traditional IRA, you may need to take required minimum distributions (RMDs) in accordance with the tax laws. The required beginning date for RMDs is April 1 of the year after you turn age 73. You are required to take an RMD by December 31 each year after that. If you delay your first RMD until April 1 in the year after you turn 73, you will be required to take two RMDs in that year. You may be subject to additional taxes if RMDs are missed. Please consult your tax advisor regarding your specific situation.Footnote 4
You are not required to take minimum distributions from your Roth IRAs during your lifetime.
Don't forget that your distribution strategy may have significant tax-time implications if you own a traditional IRA, because taxes will be due at the time of withdrawal. As a result, taking a lump-sum distribution could result in a much heftier tax bill this year than taking a minimum distribution.
The April filing deadline is never that far away, so don't hesitate to use the remaining time to shore up the retirement strategies you'll rely on to live comfortably in retirement.
Footnote 1 Early withdrawals (before age 59½) from a traditional IRA may be subject to a 10% additional federal tax.
Footnote 2 A "qualified distribution" is one that is taken at least five years after the first day of the year of your initial Roth contribution, or Roth conversion, if earlier, and after you have reached age 59½ or become disabled or deceased. If you take a nonqualified withdrawal, any investment earnings on the Roth contributions are subject to regular income taxes, and you may be subject to a 10 percent additional federal tax if you withdraw such earnings before age 59½ unless an exception applies. State income tax laws vary; consult a tax professional to determine how your state treats Roth distributions.
Footnote 3 If you are married and file separately, the phase out is between $0-$10,000.
Footnote 4 Effective January 1, 2023, a tax law change increased the applicable age for RMDs to 73 for individuals who turn age 72 on or after January 1, 2023, and who turn age 73 before January 1, 2033. If you were age 72 or older as of December 31, 2022, you are subject to the RMD rules in effect prior to January 1, 2023. If you turn age 74 on or after January 1, 2033, the applicable age is 75.
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