Tax Time! IRA Basics and Surprising Facts

Mar 8, 2020

If you have started saving for retirement, then the chances are good that you’ve heard of Traditional and Roth Individual Retirement Accounts (IRAs). Both types of IRAs are great ways to save for retirement outside of an employer-sponsored plan, such as a 401(k), and are accessible to almost everyone. IRAs may seem pretty straight-forward on the surface, but how much do you know about them? As we approach the tax deadline, people of all ages have questions about IRAs. Let’s refresh your memory of IRA basics and explore some surprising facts.

Refresher on Traditional IRAs

For tax years 2019 and 2020, an individual under the age of 50 can contribute up to $6,000 into his/her IRA. If you are over age 50, then you can contribute an additional $1,000. Contributions to the account grow tax-deferred for as long as the money is in the account. In some cases, these contributions are tax-deductible—which means your taxable income will be reduced by the amount you contribute to your IRA. Sounds pretty straight-forward, right? This is where it gets a little tricky. There are a couple of factors that determine if you can deduct some or all of those traditional IRA contributions, including whether or not you are covered by a retirement plan at work and how much money you make based on your modified adjusted gross income (MAGI). It is essential to speak with a tax professional if you are unsure about your situation.

Once you reach age 59 ½, you can take distributions from the account penalty-free. You will pay ordinary income tax on the amount of your withdrawals. Finally, once you reach age 72, the IRS makes you take a Required Minimum Distribution (RMD) each year. Initially, this amount is about 4% but increases each year gradually.

Refresher on Roth IRAs

For tax years 2019 and 2020, contribution limits to Roth IRAs are the same as Traditional IRAs. However, unlike Traditional IRAs, contributions are made with after-tax money and grow completely tax-free. Again, it sounds pretty straight-forward. Nevertheless, there are Roth IRA phase-out’s regarding contributions. This means if your MAGI is over a certain threshold (which varies depending on your filing status), then you may not be eligible to contribute the full amount—or anything at all—to your Roth IRA. Once again, if you are unsure of your financial situation, it is crucial to speak to a professional.

Once you reach age 59 ½, you can take distributions from the account penalty-free. Unlike Traditional IRAs, you will not have to pay any tax on the money you withdraw, nor are there any Required Minimum Distributions at any point in your life.

Lesser Known Facts

Since we have covered some of the basics of Traditional and Roth IRAs, let’s explore some of the lesser-known facts that may impact you.

  1. Spouses without earned income can still contribute to an IRA. If you are married and filing your taxes jointly, then only one spouse needs to have earned income to make contributions for both spouses’ IRAs.

  2. IRAs cannot be jointly owned in any circumstance.

  3. Hence the name, Individual Retirement Account.

  4. Minors can have IRAs too! This is a great way to teach your child/grandchild to start saving at a young age. The minor must have earned income, and the contributions into the account must not exceed the total amount of the child’s earned income. For example, if the child’s earnings were $2,000, then no more than $2,000 can be contributed to the IRA. The account is structured with the adult as the custodian and the child as the beneficiary; however, this does not affect the adult’s ability to contribute to their own IRA. Typically, Custodial Roth IRAs are favored over Traditional IRAs because minors generally are in a lower tax bracket.

  5. You can contribute to someone else’s IRA. If a family member or friend has an IRA, but unable to make contributions to their own IRA, then you can make contributions to their account as long as they have earned income.

  6. You can have more than one IRA. The most common reason you might have more than one IRA is that you have a Traditional IRA with pre-tax money and a Roth IRA with after-tax money—you aren’t allowed to co-mingle these dollars. Other individuals might have two or three Traditional IRAs with money from old employer-sponsored accounts that they have rolled over. For simplicity, many people will combine these IRAs into one, but sometimes people like to keep them separate. One reason might be that each IRA has different beneficiaries.

  7. There is no minimum IRA contribution requirement. Younger individuals may delay opening an IRA because they think opening the account would require depositing thousands of dollars all at once. There are a variety of financial institutions that are very accommodating, allowing you to open an IRA with only $1 and make small contributions throughout the year.

  8. Traditional IRA, Contributory IRA, and Rollover IRA are all the same type of account for tax purposes—they all contain pre-tax dollars. Don’t let the names confuse you!


IRAs are great investment accounts to save for retirement because of the tax benefits they offer. However, not everything about them is necessarily clear-cut. If you have questions about your Traditional or Roth IRA, it is always a good idea to consult with a financial professional to get the most benefit out of your retirement savings.

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Please remember that past performance may not be indicative of future results. Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.

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