As the April 15 tax deadline approaches, investors are making last-minute contributions to their Individual Retirement Accounts (IRAs). According to Fidelity Investments, the two weeks before March 20 saw an 18% increase in average IRA contributions compared to the previous five weeks, with nearly three-quarters of those deposits going to after-tax Roth IRAs. This surge in activity highlights the importance of understanding the key numbers before making a contribution.
One crucial number to know is the IRA contribution limit, which is $7,000 for 2025, with an extra $1,000 for investors age 50 and older. This limit is based on the investor's income from working and is a key factor in determining eligibility for Roth IRA contributions.
Roth IRA contributions are tax-free and grow tax-free, with no upfront tax break. However, eligibility is based on modified adjusted gross income (MAGI), which can be confusing to calculate. The MAGI calculation starts with the adjusted gross income and adds back certain tax breaks, such as deductions for IRA contributions, student loan interest, and others. The contribution limit phases out as MAGI rises, with a complete phaseout at $165,000 for single filers and $246,000 for married couples filing together.
Traditional IRA contributions, on the other hand, provide a deduction, but the money grows tax-deferred and future withdrawals are subject to regular income taxes. Eligibility for the traditional IRA deduction depends on earned income, MAGI, and participation in workplace retirement plans. Workplace plan participation could include 401(k) contributions, company matches, profit-sharing, or other employer deposits.
In conclusion, investors should carefully consider their investing goals, current and future income tax brackets, and possible tax diversification across accounts before making a last-minute IRA contribution. It's important to 'know your numbers' and understand the eligibility criteria for Roth and traditional IRA contributions to make informed decisions about retirement savings.
