IRA Contribution Limits and Types Quiz

IRA Contribution Limits

• Individuals can contribute up to 7,000or7,000 or 7,000or8,000 for those 50 or older in 2024. This applies to Traditional or Roth IRAs.
• Contributions can be made up until the tax filing deadline of the prior year, which means you can contribute to a 2023 IRA in 2024 before April 15.

Traditional vs. Roth IRA

• Traditional IRA
  • You can deduct contributions from your taxes
  • Earnings grow tax-deferred
  • You pay taxes on withdrawals in retirement
  • Required Minimum Distributions (RMDs) begin at age 73
• Roth IRA
  • You don't get a tax deduction on contributions
  • Earnings grow tax-free
  • You pay no taxes on withdrawals in retirement
  • No RMDs - The owner can choose to never take out the money unless needed.
  • Contributions are limited by income

Types of IRA Contributions - Detailed

• Regular Contribution
  • Made with earned income or other eligible compensation
  • Can be made up until the tax filing deadline of the previous year
  • Individuals 50 or older can make a catch-up contribution of $1,000 in 2024.
• Transfer
  • Direct movement of funds from one IRA to another of the same type
  • This is not considered a taxable event and is not reported to the IRS
  • Can be done between Traditional IRAs or between Roth IRAs
• Rollover
  • This is a movement of money from an IRA to the IRA owner, who then typically re-contributes the money into another IRA.
  • Indirect Rollover - The IRA owner has access to the money before re-contributing
  • Direct Rollover - The money is moved directly from one IRA to another. This often occurs from an eligible employer-sponsored retirement plan to an IRA

IRA Eligibility

• Traditional IRA
  • You must be earning compensation or filing a joint tax return with a spouse who is earning compensation
• Roth IRA
  • You must have earned income or be filing a joint tax return with a spouse earning compensation
  • You must meet Modified Adjusted Gross Income (MAGI) requirements

Compensation

• Generally Defined - Money earned from working which includes wages, salaries, commissions, self-employment income, alimony, and non-taxable combat pay
• Not Defined - Interest and dividends, earnings from property, pension or annuity income, deferred compensation, or partnership income

Required Minimum Distributions (RMDs)

• RMDs must be taken in the year you turn 73 with Traditional IRAs
• The RMD is figured by dividing the previous year-end balance by a life expectancy factor
• You can choose to take out more than the RMD each year
• The RMD age was raised to 73 in 2023

IRA Distributions

• Normal Distribution
  • In a Traditional IRA, this is a withdrawal made at age 59 1/2 or older. This includes RMDs.
  • In a Roth IRA, the owner satisfies the five-year rule and is either at least 59 1/2 or disabled.
• Transfer Distribution
  • Money moves from one IRA to another directly, without the owner ever having possession of the funds. The check is payable to the receiving institution.
• Rollover Distribution
  • Funds are distributed from one IRA to the IRA owner. This is a "indirect rollover" as typically the individual will re-contribute the money into a new IRA.