IRAs can be a powerful tool to lower taxes, all while saving for retirement or other predetermined uses. Here are five fairly unreported things to know about IRAs.
- A nonworking spouse can have an IRA. This can be a great way to help reduce your taxable income each year. If your spouse doesn’t work, you may still be able to open and contribute to an IRA for your spouse, assuming that you work and file a joint tax return.
- Even children can have IRAs. You can open and contribute to an IRA if your child has earned income. Ensure you can document the earnings. While your child can contribute their earnings, many parents will help keep track of things like babysitting money, then match those earnings in either a traditional or ROTH IRA. Often the ROTH IRA is preferred because the future earnings could be tax-free! An adult manages your child’s IRA until they are old enough to transfer the account to their name.
- You may still contribute to an IRA if you have a 401(k) or similar program at work. As long as you do not exceed the income limits, it is ok to have both an IRA and other retirement savings plans. It’s simply important to know your options and schedule accordingly.
- Non-deductible contributions may be made. If you exceed IRA income phaseouts, contributions to your IRA may not reduce your taxable income for the year. But you may still want to make after-tax contributions to a non-deductible IRA. Remember, while you are taxed on the contributions to a non-deductible IRA, the earnings can still grow tax-deferred.
- It’s not just for retirement. With traditional IRAs, if you withdraw funds before the age of 59 1/2, you may be subject to income tax AND an early withdrawal penalty. But there are exceptions to this rule. These include withdrawals for a first-time home purchase, significant medical bills, college costs, birth/adoption, and many others. However, it is essential to know the rules BEFORE withdrawing the funds.
Tax rules surrounding IRAs are vast and complex. But within the rules are numerous situations that can help you plan for a more tax-efficient future if you know they exist.