Despite the tax law change that affected deductions for many IRA accounts, these accounts are still an important part of retirement planning.
Here, from Fidelity Investments, are updated answers to commonly asked questions:Who can invest in an IRA?
Anyone under the age of 70 1/2 who has earned income. If you are married and don't work, your spouse can start an IRA for you.
How much can I invest?
You can invest up to $2,000 (or 100 percent of your employment income, whichever is less) in an IRA every year.
Where can I open an IRA?
Your IRA may be invested in bank certificates of deposit or accounts, mutual funds, stocks, bonds, annuities or any combination. You cannot invest in collectibles or heavy metals.
But with tax changes, how is the IRA still beneficial?
Some people are still eligible for IRA tax deductions under the new tax law. If you are not covered by an employee pension plan, your IRA contributions are fully deductible, no matter what your income. (If you are married and filing tax returns jointly, your spouse cannot be covered by a pension plan, either.)
If you have a pension plan, your IRA deduction depends on your income level. If your joint income is $40,00 or below ($25,000 for individuals), you can make fully deductible contributions, whether or not you are covered by an employer pension plan.
If your joint income is between $40,000 and $50,000 ($25,000 and $35,000 for individuals), your IRA contributions is partly deductible.
However, whether or not your contributions are tax deductible, an IRA can be an excellent tax-advantaged investment for your retirement program.
Compare a $2,000 non-deductible annual IRA investment made on the first of every year with a comparable taxable investment over a 20-year-period. Our comparison uses a hypothetical 10 percent annual return. We've assumed annual compounding and have applied the highest possible marginal tax rate of the new tax law: 33 percent.
After 20 years, a taxable investment gives you $84,672. Your IRA investment grows tax-deferred to $126,005 during the same period, which after taxes gives you $97,625.