If you are a high-net-worth individual, contributing to an IRA may not even cross your mind, but, I encourage you to do so, no matter your age. The same advice holds true for low earners who may not realize they can benefit from tax credits to offset the cost of a contribution. (I'll go through tax credits in an upcoming column.)
For the wealthy, it's a mistake to conclude that the low contribution levels aren't worth the effort. The payoff is realized over time through the math of tax-deferred compounding over decades with a traditional IRA. Better yet, it is decades of tax-free compounding with a Roth IRA. (While high earners are not eligible to set up a Roth, they are eligible to convert traditional IRAs to Roth IRAs.)
Withdrawals from traditional IRAs are subject to taxation, while Roth IRAs are not.
As an example of the power of compounding over a long horizon, assume you are 25 years old contributing $7,000 a year for 40 years while investing in the S&P 500 Index. History tells us your worst age-65 result would have been a little over $3 million, considering all 40-year periods since the late 1920s. The median would have been $4.7 million. The best would have been $8.9 million. That's a powerful reason to talk to your children and grandchildren about their IRAs -- or to make gifts to them to use to fund their own IRAs. (Let me know if you would like a copy of a column on kids' IRAs -- write to me at readers@juliejason.com.)
Another element is the value of segregation. Irrespective of financial circumstances, contributing to either a tax-deferred (traditional IRA) or a tax-free (Roth IRA) has the benefit of segregating those savings dollars from other uses. Think of the goal of the IRA as strictly to help fund retirement. That's important. Not having separate accounts for separate purposes makes it easier to put off a distant retirement when a current need is more pressing.
Let's review a few basics.
Who is eligible? Anyone of any age can contribute to an IRA (even if they participate in a retirement plan at work) as long as they have "earned income." (Before 2020, those over age 70 1/2 were ineligible -- see tinyurl.com/2s3878wf.)
Earned income is taxable compensation including "wages, salaries, commissions, tips, bonuses, or net income from self-employment" (tinyurl.com/yp76xnke). Also be aware that you can set up an IRA for a spouse who has no earned income. (That exception does not apply to children; they have to have earned income.)
How much can you contribute? There are limits.
For 2024, the maximum contribution is $7,000 ($8,000 if you are age 50 or older). You can still make a contribution for 2023; the maximum is $6,500 if you are under age 50 and $7,500 if you are 50 or older.
Assuming you have not contributed for 2023 yet, and you are under 50, you can contribute a maximum total of $13,500 for the two tax years (2023 and 2024). When you make the contribution, you'll need to advise the IRA custodian that you are making two contributions for two different tax years, $6,500 for 2023 and $7,000 for 2024.
If you are 50 or older, your maximum contribution for the two years is $2,000 more ($15,500). Again, tell the custodian that you are making two contributions, one for 2023 ($7,500) and one for 2024 ($8,000).
While the deadline for 2023 IRA contributions isn't until April 15, 2024, there is no reason to delay your 2023 or 2024 contribution.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION