Each year, individuals with earned income may decide to put $6,000 ($7,000 if age 50 or older) into an IRA to save for retirement. The decision to contribute to a traditional IRA versus a Roth IRA has several key considerations, such as eligibility, tax-deductibility, and current versus future tax rate. The below chart outlines some features of each type of IRA to aid in the important decision of which IRA to fund annually.

Five important questions to ask:

Do I need a tax deduction, and am I eligible for it?

• If you are covered by a workplace retirement plan and are a single filer, adjusted gross income (AGI) under $66,000 will allow for a full tax deduction on a traditional IRA contribution.
• If you are covered by a workplace retirement plan and are married filing jointly, AGI under $105,000 will allow for a full tax deduction on a traditional IRA contribution.
• If you (and your spouse if married) are not covered by a workplace retirement plan, you can have any AGI level and fully deduct your traditional IRA contribution.

Am I eligible to make a Roth IRA contribution?

• If a single filer and have AGI under $125,000, you may make the full $6,000 ($7,000 if age 50+) Roth IRA contribution.
• If married filing jointly and have AGI under $198,000, you may make the full $6,000 ($7,000 if age 50+) Roth IRA contribution.

Is my tax rate going to be higher now or higher in the future?

• If you believe your tax rate is going to be the same or higher in the future, a Roth IRA is more beneficial, as those assets will be tax-free after five years and age 59½.

Are my beneficiaries in high tax brackets?

• Under the SECURE Act’s 10-year rule, non-spouse beneficiaries must have inherited IRAs depleted over 10 years instead of taking minimum distributions each year over a life expectancy. • If beneficiaries are in a high tax bracket, inheriting tax-free Roth IRA money does not get taxed at the beneficiary’s high rate.

How long do I have until retirement or needing access to this money?

• The younger the investor, the longer time horizon he or she has to compound earnings in an IRA.
• Since Roth IRA earnings will eventually be tax-free, Roth IRAs become more appealing for younger investors.

Bonus question: Do I have a larger concentration of pre-tax or Roth IRAs and retirement plans?

• By having a large concentration of only pre-tax IRAs and retirement plans, you are subject to RMDs and must start paying taxes on this money at age 72.
• By having a tax-diversified portfolio with some pre-tax and some Roth IRAs, you have the flexibility to draw from both account types to minimize tax liability.
  

Final round: Why contributing early in the year matters IRA owners can make IRA contributions for 2021 from January 1, 2021 – April 15, 2022, so why does it pay off to contribute early?

Over the course of 20 years, a $6,000 contribution invested in January of each tax year versus on April 15 of the following year can make a significant difference:
As you can see in the chart to theright, by waiting just 15 months, thecost could be $23,794. By making IRA contributions earlier in the year, the account’s value has more time to grow and compound earnings.
The IIAR and ARF reserve investment funds are currently managed by Stifel Financial Services under the investment policy established by their respective board of directors. Members of IIAR may use the services of Stifel for personal and business investments and take advantage of the reduced rate structure offered with IIAR membership. For additional wealth planning assistance, contact your Stifel representative: Jeff Howard or Jim Lenaghan at (251) 340-5044.