People in the accumulation phase of their working lives are often concerned about “maxing” out individual retirement account (IRA) contributions while retirees are concerned about annual required minimum distributions (RMD). Whether contributing or withdrawing, the amounts change almost annually due to inflation protections and life expectancy tables. Below is a discussion on 2014 traditional IRA rules.
2014 IRA Contribution Considerations
A traditional IRA is a fantastic retirement tool that allows tax deductions for those contributing and tax-deferred growth on investments. IRA rules also allow those investors nearing retirement age (50 years and older) to contribute more to their IRA plans than someone younger. If you are engaged in 2014 retirement planning, below are the IRA contribution limits for 2014:
- $5,500 for those below age 50
- $6,500 for those above age 50
- Anyone age 70 ½ + cannot contribute to a traditional IRA
In order to contribute to an individual retirement plan, one must earn a taxable income. In other words, in order to contribute $5,500, for example, a person must have made at least $5,500 in taxable income.
2014 IRA Distribution Considerations
If you are a retired traditional IRA investor over age 70 ½ or you have inherited a traditional IRA, you are probably considering your 2014 required minimum distribution (RMD) amount. While investment growth of a traditional IRA is tax-deferred, withdrawals are considered ordinary income. A required minimum distribution is calculated based on the total IRA account balance and your life expectancy or the life expectancy of who you inherited it from. Please keep in mind a few other IRA withdrawal considerations outside of retirement and inheritance:
- As a broad rule, taking a distribution from a traditional IRA account before age 59 ½ will result in a 10% IRS penalty. Consult your tax expert for more specifics on penalty exclusions.
- ROTH IRA accounts do not have required minimum distributions.
- The penalty for missing your 2014 RMD is 50% of the difference between what should have been distributed and what actually was.
- There is no penalty for withdrawing more than your required minimum distribution.
While it may feel like 2014 is almost over, IRA contributions can be made until April 15th 2015. This allows anyone planning for retirement to consult with his or her tax advisor to choose the most tax-advantaged amount of contribution or withdrawal based on concrete 2014 taxable income calculations.
