With the April 15 tax deadline looming, many investors are making last-minute contributions to their Individual Retirement Accounts (IRAs). This year, the surge in deposits is notable, with a 18% increase in average IRA contributions in the two weeks before March 20, according to Fidelity Investments. This trend highlights the importance of understanding the key numbers and eligibility criteria for IRA contributions.
The Roth IRA: Tax-Free Growth and Retirement Benefits
One popular option is the Roth IRA, which offers tax-free growth and tax-free withdrawals in retirement. However, it's crucial to know your numbers before contributing. The eligibility for Roth IRA contributions is based on Modified Adjusted Gross Income (MAGI), which can be confusing to calculate. For 2025, single filers with a MAGI of less than $150,000 and married couples filing jointly with a MAGI of under $236,000 can contribute up to $7,000 (or $8,000 for those aged 50 and older) to a Roth IRA.
The MAGI calculation is complex, starting with Adjusted Gross Income and adding back certain tax breaks while subtracting income from Roth conversions and retirement plan rollovers. 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 jointly.
Traditional IRA: Deductions and Tax-Deferred Growth
In contrast, traditional IRAs offer a deduction for contributions, but the money grows tax-deferred, and withdrawals are subject to regular income taxes. Eligibility for the traditional IRA deduction depends on earned income and participation in workplace retirement plans. The deduction phases out based on MAGI and filing status.
However, financial experts advise against rushing to contribute just to meet the deadline. Joon Um, a certified financial planner, emphasizes the importance of considering your investing goals, current and future income tax brackets, and tax diversification across accounts. Understanding your MAGI and eligibility criteria is crucial to making informed decisions about your IRA contributions.
As the tax deadline approaches, investors should take the time to educate themselves about the different types of IRAs and their eligibility criteria. Knowing your numbers and making informed choices will ensure that your retirement savings are optimized and aligned with your financial goals.
