When you are planning your retirement, you obviously look for an option that let you grow your retirement benefits easily. One such option is to put your money in an individual retirement account or IRA. But some people fail to invest in this plan despite wanting to because there are so many myths going around. Here we are busting the 6 IRA myths to help you clear your doubts and make better investment decisions.
List of 6 IRA Myths that Prevented You from Increasing Your Retirement Benefits
- You cannot contribute to traditional IRA, Roth IRA and a 401(k) in the same year
This myth has prevented many people from increasing their retirement benefits to a maximum limit. Let’s get real, people. You are free to invest in all the accounts if you stay within the annual allowable limits. When you are a part of the employer sponsored retirement plan, you can contribute up to $18,000 and an additional $6000 if you are more than 50 years of age.
You can also contribute to the traditional and Roth IRA on top of that given the total amount in all the plans is not beyond the maximum annual allowable contribution limit of $5,500. You can even add a $1,000 catch-up contribution in case you are older than 50. Adding it all up, it is clear that a saver could save about $23, 500 a year or $30,000 for people who are more than 50.
- Big earners cannot contribute to an IRA
It is a fact that if you earn more than $196,000 if you are married and $133,000 if you are single, you cannot contribute to a Roth IRA. But even if you earn a massive check, you can still contribute to traditional IRA. The only thing worth remembering here is that the IRS takes into account your household income and the fact whether your spouse has access to a workplace retirement plan or not while deciding the amount of your IRA contributions.
- IRA is not worth it if a person doesn’t qualify for a deductible amount
Though the upfront tax deduction of IRA often gets all the glory, it is a valuable fact that all investment within IRAs grows tax deferred. It is true for non-deductable IRA’s too. So you don’t have to pay any income the retirement benefits savings you do via IRA until you withdraw the money in retirement.
- Low earning spouses are not eligible for contributing to an IRA
If you are a stay at home parent or you are married to someone who has a hard earned income and you file a joint tax return, then you can save more towards your retirement benefits via spousal IRA. As per this rule, you can contribute to a Roth IRA or a traditional IRA or the contributions can be made on your behalf. Just remember that the IRA must be set up in your name rather than your earning spouse. The eligibility and the deductibility would be based on what is applicable to the spouse who has a higher compensation.
- You should use the IRA only when you retire
Though you must try not to touch your IRA account until you retire and need the retirement benefits for surviving, there are a few exceptions to this rule. You can get a waiver on an early withdrawal penalty on traditional and Roth IRA if you are going for a first time home-purchase or you are paying for certain qualified expenses pertaining to higher education. If you need the money for the reasons other than these, you would be smart to opt for withdrawal from Roth IRA because it is more flexible than 401(k) and traditional IRA. You should remember that the IRS allows penalty and tax free withdrawals of contributions from Roth IRA for any reason and at any time.
It is highly recommended that you let the retirement benefits savings as they are for as long as possible. If you are younger than fifty nine and a half years, you will have to face 10 percent early withdrawal penalty and even an income tax IOU. It’s better to avoid both if and when you can.
- The deadline to contribute to IRA for the 2016 tax year has passed
This is a big fat lie. The tax filing deadline is April 18, 2017. You have more than two months to contribute to an IRA for tax year 2016 and increase your retirement benefits savings. Always remember to indicate that it’s your 2016 contribution while adding the money to the account. You are also free to start adding funds to your IRA for 2017. Remember, the earlier you contribute to an IRA, the more time will be given to your money to compound and grow.