The Federal government allows anyone with earned income to contribute up to a set amount of money annually in an IRA in addition to an employer sponsored retirement plan. The biggest mistake most people make is NOT contributing anything at all in their IRA accounts. In a recent TIAA-CREF survey, only 18% of Americans are actively contributing to an IRA. Each year you avoid making contributions results in a huge loss of retirement income that could've been benefiting from compounding interest. When you're young with many years ahead of for retirement, time is your greatest asset. With current contribution limits set at $5,500 for individuals up to age 50 and $6,500 for adults 50 and older, if you haven't yet established an IRA account the time is NOW. 


If you think your tax bracket will be lower in retirement, then it might be worthwhile to consider contributing to a Traditional IRA. Traditional IRAs allow you to make pre-tax contributions while your investment grows tax deferred, meaning you don't have to pay taxes on any gains until withdrawal, but you'll pay ordinary taxes in retirement on the contributions AND investment gains. Contributions are also deductible on your tax returns but are restricted based on income. If you decide to make contributions to a Traditional IRA talk to your accountant about your eligibility for potential deductions. There are also minimum required withdrawals that begin at age 70 1/2. Failing to meet these requirements can result in heavy taxation which can make this option less desirable.


The ROTH IRA is perhaps the most favored option of the 2 because of the tax free compounding benefit. A ROTH is funded with after tax dollars and the entire account is free of any income tax on withdrawals in retirement. That means Uncle Sam won't put  his crummy fingers on the contribution or the gains. That is a HUGE benefit that offers an opportunity for tax diversification in retirement. What if you've been diligently contributing to a Roth for 15 years and at age 50 you find yourself in a pinch and have no emergency fund? Although a ROTH is an investment account, it's also technically a savings vehicle since contributions can be withdrawn tax and penalty free at any time. Why? The key to remember here is that you've already paid taxes on the contributions. So the principal is yours free and clear. Things start to get hairy once you start touching investment gains, which is subjected to tax. There are instances in which withdrawals of earnings can be taken without incurring penalties (although still subjected to taxes), which makes ROTH IRAs more attractive than Traditional IRAs. If you've had a ROTH for more than 5 years, and you decide to purchase your first home, the First Time Home Buyer Clause allows you to withdraw a maximum of $10,000 towards your purchase. Funds can also be used for qualifying educational expenses. A deeper dive in the rules surrounding a withdrawal should be conducted depending on your particular situation. The general rule of thumb is withdrawals of any kind are highly discouraged before 59 1/2 to harness the full benefits of consistent contributions with time and compounding interest.


The Federal government designates income limits for Roth IRA contributions that are subjected to change yearly. For Traditional IRA's, regardless of your income level you can contribute any amount up to the IRS's annual maximum ($5500 up to age 50 and $6500 over age 50). However, there are income restrictions on the ability to deduct Traditional IRA contributions. Again, if you decide to go this route, your tax accountant can help guide you through the income limitations with deductions. The ROTH is undoubtedly the most popular option with tax free earnings and the flexibility it offers. However, NOT everyone is allowed to contribute to a ROTH. If you filed Single in 2016, your ability to contribute the maximum to a ROTH was capped at the adjusted gross income of $116,000. If you filed Married in 2016, full contribution was possible if your household adjusted gross income was less than $184,000. Beyond these limits, the IRS allows partial contributions within specific thresholds for each category. For single filers the threshold was $117,000-$132,000 and for married it was $184,000-$193,999. In essence, if you were single or married and your income exceeded $132,000 & $194,000 respectively, then you were NOT eligible to contribute directly to a ROTH IRA. If your income exceeds these limits, then the federal government considers you a high income earner.



High Income Earners  and wealthy individuals can still enjoy the benefits of tax free earnings by leveraging the BACK DOOR CONVERSION to a ROTH account. A back door ROTH allows you to skirt around the income limits by converting a Traditional IRA  into a ROTH IRA. The most optimal way is to contribute to a Traditional IRA with after tax dollars first, and then convert to a ROTH IRA. The sooner the conversion is done, the less chances of having a tax bill on potential gains. Although if you do have some gain, the tax bill is likely to be minimal.


I regretfully admit that neither I or Mr. Mindful Dollar ever opened an IRA in the past. Since I recently started taking a more serious approach to managing our finances, I was thrilled to learn that the IRS allows you to make 2016 contributions up to the deadline of April 18, 2017. Not wanting to lose another year of tax free retirement savings, I immediately sprung into action and established our IRA acounts and made contributions for 2016 and 2017.

Where can I establish an IRA?

There's a plethora of options to choose from to establish and fund your IRA. I personally set up our accounts with Vanguard not just because they invented index funds, but also because they're known for having the lowest fees in the industry and they also offer a selection of no-transaction-fee mutual funds and commission free ETFs. Vanguard's retirement funds have a $1,000 investment minimum so much isn't required to get started. There are other options that might be worth considering like TD Ameritrade, Fidelty, Charles Schwab and E*Trade. Do your research to see what account best suits your needs. See Nerd Wallet's full review for 2017's Top Picks for the best IRA account options.


Do you consistently contribute to a ROTH IRA year after year? If not, will you sign up TODAY and get on the road to planning for retirement?