You should also note that the deadline for IRA contributions for any given fiscal year is tax day, usually around April 15 of the following calendar year. Finally, keep in mind that if you invest in both a Roth IRA and a traditional IRA, the total amount of money you contribute to both accounts cannot exceed the annual limit. But if you are married and one of you does not work, the employed spouse can make a contribution to a so-called spousal IRA for the other. If you haven't yet taken note of the IRS's cost-of-living adjusted contribution limits for workplace retirement plans, now may be the time to plan for the future.
Contributions to your 401 (k) come directly from your salary and are made with pre-tax dollars, reducing your taxable income. Instead, the money goes to a Roth IRA after you've paid taxes on it, and you can withdraw contributions at any time without taxes or penalties. Married couples filing jointly can make the maximum contribution to an IRA as long as their combined income exceeds the amount they are contributing, even if one spouse does not meet the income requirement. You can open a Roth IRA through a bank, brokerage, mutual fund, or insurance company, and you can invest your retirement money in stocks, bonds, mutual funds, exchange-traded funds and other approved investments.
If you are covered by compensation limits or elective deferrals, are a key employee, or can be defined as a highly paid employee, and if you have an employee share ownership plan, a SEP or SIMPLE IRA plan, or any other retirement provision covered by the Internal Revenue Code (IRC), then provisions that cover you may also have changed. If you don't withdraw your excess contributions by the tax filing deadline, you'll pay a 6% tax on that money. Contributions to a traditional IRA may be tax-deductible in the year of contribution, and current income tax must be paid at retirement. You should receive Form 1099-R, which shows what you did with your excess contribution so you can add it to your taxable income.
If you transfer another retirement plan, such as a 401 (k) plan from a previous employer, to your IRA, the transfer will not count toward your annual contribution limit. If you (and your spouse, if married) are covered by an employer-sponsored retirement plan, then the traditional IRA tax deduction may be capped based on your modified adjusted gross income (MAGI), that is, your income, before subtracting the loan interest tax deduction students and other tax deductions. The limit also does not apply to transfers from other retirement accounts, such as those used to create an accumulated IRA.