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Things To Know About IRAs

MoneyWise

Christian talk radio with Rob West

March 29, 2022

More than 60 million Americans hold some type of IRA account, and although IRAs are popular, there’s a lot that people don’t know about them. We’ll fill you in today on MoneyWise. Here’s something you might not know about IRAs: The total amount of money Americans hold in IRAS is a staggering $13. 2 trillion!! NON-WORKING SPOUSE CONTRIBUTIONS Something else you might not know: While it’s generally true that IRA contributions must be made with earned income, a nonworking spouse can open and contribute to an IRA. The other spouse must have earned income and the couple must file a joint federal tax return, but meeting those requirements, a nonworking spouse can contribute as much to a spousal IRA as the wage earner in the family. The catch is that the working spouse's income must equal or exceed the total IRA contributions of both spouses. Both traditional and Roth IRA contributions are limited to $6, 000 in 2022 or $7, 000 if you’re over age 50. DON’T QUALIFY FOR TAX-DEDUCTIBLE CONTRIBUTIONS? Here’s another little known fact: If you don’t qualify for tax-deductible contributions because your income is too high, you can still open a traditional IRA. Your contributions won’t be deductible, but that money and any earnings you accrue will grow tax-free until you withdraw them, so there’s still an advantage to opening an IRA. On that same note, you can still open a Roth IRA even if your income is above the limit. You would do it by converting your traditional IRA to a Roth. Now, that’s assuming you made tax deductible contributions to your traditional IRA before your income began to exceed the limit. When you convert, you’ll have to pay taxes on that money, but your future withdrawals from the Roth account will be tax-free. Another benefit to the Roth is that you won’t have to begin taking required minimum distributions when you reach age 72. SELF-EMPLOYED? This next IRA fact applies to those who are self-employed or have money coming in from a side business. You can save a lot more with a Simplified Employee Pension plan, otherwise known as a SEP IRA. It’s similar to a traditional IRA. Your contributions are tax deductible, but the contribution limits are much higher. As the employer, the amount you can put in will vary based on your earned income. The SEP IRA contribution limit for 2022 $61, 000 or 25% of your income, whichever is lower. Again, if you’re 50 or older, the IRS allows you to contribute an additional $1000 to your IRA each year, and it’s definitely something you want to take advantage of. For example, if at age 50 you begin adding the extra $1000 to your IRA, and given an annual average return of just 6 percent, you would have nearly $40, 000 more in your account at age 67. So make plans to boost your IRA contributions at age 50 and beyond. CHILD WITH TAXABLE INCOME? Here’s another tidbit you probably didn’t know: If you have a child with taxable earned income, you can open a Roth IRA for the youngster. Talk about getting a jumpstart on retirement saving! And you’re probably thinking No way is my kid going to put odd job or babysitting money into a retirement account. No problem. You or the grandparents can contribute gift money into the child’s IRA. Contributions are limited to the actual amount the child has earned or $6, 000, whichever is less. That’s still far below the 2022 gift tax exemption of $16, 000 per person so you won’t have to file the federal gift tax form. This type of account is called a custodial IRA. You would manage it until the child reaches the appropriate age to transfer the funds into the child’s own Roth IRA. That age varies by state. Here’s something else you might not know: the money in a custodial IRA won’t be counted as assets when you fill out the Free Application for Federal Student Aid or FAFSA form when it’s time for the child to enter college. The only caveat to a custodial IRA is that one day, you’ll have to turn it over to the child, who will then have access to those funds. Make sure you impress upon the child the importance of letting that money grow. TIMING MATTERS And here’s one more thing you might not have known about your IRA: It makes a difference when you make your contributions. Don’t wait until the end of the year to make a lump-sum contribution. Instead, put the money in at the beginning of the year or in monthly installments. That way you’ll get more compounding effect on the money. LISTENER QUESTIONS On today’s program, Rob also answers listener questions: ●Would it be wise to use an inheritance on home repairs? ●In what order should you pay off your debts, and how do you balance that with saving? ●Is investing in gold and silver a wise investment alternative to investing in the stock market? ●How do you determine whether you need life insurance? RESOURCES MENTIONED ●MoneyWise App

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