April 15 is approaching, and that is the deadline to be able to put money into your IRA for 2020.
Financial resource Carl Carlson, CEO of Carlson Financial, broke it down.
He said to start, check to see if you have already maxed it out. The maximum amount of money you can put in per year is $6,000 per person, and if you are over 50, you are allowed an additional $1,000 - so, $7,000.
The amount of money that you put into your 401(k) does not count towards the maximum, Carlson said. There is no connection between how much you put into your work retirement plan, like your 401(k), TSP, TIAA Cref or 403b.
Carlson said the IRA is completely separate from that. So, you can put the maximum of $19,500 into your 401(k) and another $6,000 into your IRA.
There are some restrictions that might prohibit you from putting money into an IRA. Carlson said if you were married and made more than $124,000 MAGI, then you cannot deduct the money you put into your IRA from your taxes; that number is $75,000 for singles. However, the income maximizations are considerably higher for Roth IRAs: $206,000 for married and $139,000 for singles.
The difference between the normal IRA and the Roth IRA is that the normal or Traditional IRA allows you to deduct the money you put in from your taxes for the year you put the money in for and then allows the money to grow tax deferred. However, you must pay the taxes eventually when you take the money out.
Carlson added that with the Roth IRA, you do not get a tax deduction when you put the money in, but the money grows tax-free, and as long as you wait five years you can take the money out without any taxes.
So, if you make too much to fund a Traditional IRA, don’t forget that the limit is much higher for a Roth IRA so you may be able to put money you have just sitting in savings into the Roth and let it start performing tax-free, Carlson said.
You may even have investments in non-IRA accounts that you could just move over to a Roth IRA and get the tax free benefits, he added.