It's the time of year when IRA contributions are on many people's minds—especially those doing their tax returns and looking for a deduction.
Chances are, there may be a few things you don't know about IRAs. Here are 7 commonly overlooked facts about IRAs.
1. A nonworking spouse can open and contribute to an IRA
A non-wage-earning spouse can save for retirement too. Provided the other spouse is working and the couple files a joint federal income tax return, the nonworking spouse can open and contribute to their own traditional or Roth IRA. A nonworking spouse can contribute as much to a spousal IRA as the wage earner in the family.
For tax year 2024, the annual IRA contribution limit for both Roth and traditional IRAs is $7,000. If you're age 50 or older, you can contribute an additional $1,000 annually, and the amount of this additional contribution will be adjusted yearly for inflation.
The amount of your combined contributions can't be more than the taxable compensation reported on your joint return.
2. Even if you don't qualify for tax-deductible contributions, you can still have an IRA
If you're covered by a retirement savings plan at work—like a 401(k) or 403(b)—and your modified adjusted gross income (MAGI) exceeds applicable income limits, your contribution to a traditional IRA might not be tax-deductible.1 But getting a current-year tax deduction isn't the only benefit of having an IRA. Nondeductible IRA contributions still offer the potential for your money to grow tax-deferred until the time of withdrawal. You also have the option of converting those nondeductible contributions to a Roth IRA (see fact number 7 below). However, note that nondeductible IRA contributions will require additional recordkeeping and reporting to the IRS each year.
3. As of 2019, alimony does not count as taxable compensation to the recipient
That's due to changes in the law introduced by the Tax Cuts and Jobs Act of 2017: Alimony payments from agreements entered into January 1, 2019 or after, are no longer considered taxable income to the recipient. As such, one could not make IRA contributions based on alimony payments from agreements starting or altered as of January 1, 2019. Alimony agreements entered into prior to December 31, 2018 are exempted; they are tax-deductible for the person making the payments, and count as income to the recipient. It is the date of the agreement that decides the taxation of the alimony payment; not the year of receipt of the funds.
4. Self-employed, freelancer, side-gigger? Save even more with a SEP IRA
If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA.
Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA. The SEP IRA is similar to a traditional IRA where contributions may be tax-deductible to the small business, not necessarily the individual —but the SEP IRA has a much higher contribution limit. The amount you, as the employer, can put in varies based on your earned income.
As the employer, you can contribute to a SEP IRA for the current tax year up until the tax-filing deadline in April.
In 2024, SEP IRA contributions are capped at $69,000 for all individuals or 25% of your eligible compensation if you are not self-employed, whichever is lower.
Self-employed people can contribute up to 20%2 of eligible compensation to their own account. However, this does not apply to everyone. Please refer to the Deduction Worksheet for Self-Employed in IRS Publication 560 to determine your contribution limit. The deadline to set up the account is the tax deadline. But, if you get an extension for filing your tax return, you have until the end of the extension period to set up the account or deposit contributions.
5. "Catch-up" contributions can help those age 50 or older save more
In 2024, if you're age 50 or older, you can save an additional $1,000 in a traditional or Roth IRA each year. Beginning this year, this amount will be adjusted yearly for inflation. This is a great way to make up for any lost savings periods and make sure that you are saving the maximum amount allowable for retirement. For example, if you turn 50 this year and put an extra $1,000 into your IRA for the next 20 years, and it earns an average return of 7% a year, you could have almost $44,000 more in your account than someone who didn't take advantage of the catch-up contribution.3
6. You can open a Roth IRA for a child who has taxable earned income4
Helping a young person fund an IRA—especially a Roth IRA—can be a great way to give them a head start on saving for retirement. That's because the longer the timeline, the greater the benefit of tax-free earnings. Although it might be nearly impossible to persuade a teenager with income from mowing lawns or babysitting to put part of it in a retirement account, gifting money to cover the contribution to a child or grandchild can be the answer—that way they can keep all of their earnings and still have something to save.
For 2024, anyone can contribute to a Roth IRA for Kids as long as the total amount doesn’t exceed the child’s taxable compensation that year or $7,000, whichever amount is less. That's still well below the annual gift tax exclusion ($18,000 per person, per beneficiary, in 2024).
The Fidelity Roth IRA for Kids, specifically for minors, is a custodial IRA. This type of account is managed by an adult until the child reaches the appropriate age for the account to be transferred into a regular Roth IRA in their name. This age varies by state. Funds in the custodial IRA do not count toward assets when considering Expected Family Contributions for college. Bear in mind that once the account has been transferred, the account's new owner would be able to withdraw assets from it whenever they wished, so be sure to educate your child about the benefits of allowing it to grow over time and about the rules that govern Roth IRAs.
7. Even if you exceed the income limits, you might still be able to have a Roth IRA
Roth IRAs can be a great way to achieve tax diversification in retirement. Distributions of contributions are available anytime without tax or penalty, all qualified withdrawals are tax-free, and you aren't required to take required minimum distributions.5,6 But some taxpayers make the mistake of thinking that a Roth IRA isn't available to them if they exceed the income limits.7 In reality, you can still establish a Roth IRA by converting a traditional IRA, regardless of your income level.
If you don't have a traditional IRA you're still not out of luck. It's possible to open a traditional IRA and make nondeductible contributions, which aren't restricted by income, then convert those assets to a Roth IRA. If you have no other traditional IRA assets, the only tax you'll owe is on the account earnings—if any—between the time of the contribution and the conversion.
However, if you do have any other IRAs, you'll need to pay close attention to the tax consequences. That's because of an IRS rule that calculates your tax liability based on all your traditional IRA assets, not just the after-tax contributions in a nondeductible IRA that you set up specifically to convert to a Roth. For simplicity, just think of all IRAs in your name (other than inherited IRAs) as being a single account. Since this is complicated make sure you speak with a knowledge tax advisor who can help you understand any nuances related to your specific situation.
Read Viewpoints on Fidelity.com: Answers to Roth conversion questions