Since the coronavirus pandemic has caused so much economic uncertainty this year, it’s the perfect time to get serious about funding your retirement. There are a variety of accounts you can use, but an IRA or Individual Retirement Account is one of the best options.
I’m a fan of using retirement accounts because they come with tax advantages that make your money go further. The downside is that you must follow strict rules to qualify for the tax benefits, which can seem confusing at first.
If you’ve been shying away from using an IRA, this post covers everything you need to know, including what’s new in 2020 related to the coronavirus. We’ll review 15 IRA rules so you can use an IRA confidently, no matter if you’re employed, self-employed, or unemployed.
1. You must have earned income to contribute to an IRA
The only qualification for using an IRA in a given year is that you have earned income. It can be any kind of taxable compensation, such as a salary, wages, tips, bonuses, commissions, or self-employment income.
Here are the IRA rules 2020: You can contribute an amount equal to your taxable compensation up to $6,000 or up to $7,000 if you’re age 50 or older.
2. Your contributions to a traditional IRA are tax-deductible
In general, you don’t pay tax on contributions to a traditional IRA until you withdraw them. Both your contributions and account earnings grow tax-deferred until you take distributions in retirement.
This year, the SECURE Act changed the age when you must begin taking required minimum distributions (RMDs) from 70½ to 72.
This year, the SECURE Act changed the age when you must begin taking required minimum distributions (RMDs) from 70½ to 72. RMDs dictate a schedule for withdrawing money from a retirement account paying tax on it.
Another significant change is that you can make contributions to a traditional IRA for as long as you have earned income. Previously, you couldn’t contribute past age 70½. Now, you have more time to grow your nest egg if you’re still working into your 70s.
3. Your contributions to a Roth IRA are not tax-deductible
Tax on a Roth IRA works the opposite of a traditional IRA because you must pay tax upfront on your Roth contributions. However, your contributions and account earnings are completely tax-free when you make withdrawals in retirement. This valuable benefit can save you a massive amount of taxes.
Your contributions and account earnings are completely tax-free when you make withdrawals in retirement.
Like with a traditional IRA, you can make contributions at any age, as long as you have earned income. But there are no required…