Personal Finance

You still have time before this year’s April 17 tax deadline to contribute to a traditional IRA for 2017—and possibly get a tax deduction for the money you save in your individual retirement account.

IRA Contribution Limits for 2017

The maximum amount you can contribute to an IRA for 2017 is $5,500 if you’re younger than age 50. Workers age 50 and older can add an extra $1,000 per year in “catch-up” contributions. You must have earnings from work to contribute to an IRA, and you can’t put more into the account than you earned.

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Your 2017 IRA contributions may also be tax-deductible. If you—and your spouse, if married—don’t have a retirement plan at work, such as a 401(k), you can deduct the full contribution to your traditional IRA on your tax return no matter how much you earn.

Even if you have a retirement plan on the job, you may still be able to deduct some or all of your contribution depending on your income. For 2017, singles with modified adjusted gross income of up to $62,000 and married joint filers with income of $99,000 or less can deduct their full contributions. The deduction phases out as income rises above those levels, and it disappears entirely once income reaches $72,000 for singles and $119,000 for joint filers.

IRA Contribution Limits for 2018

For 2018 IRA contributions, the amount of income you can have and still get a full or partial deduction rises slightly. Singles with income of $63,000 or less and joint filers with income of up to $101,000 can deduct their full contribution for the 2018 tax year. Deductions thereafter decrease and phase out completely once income reaches $73,000 for singles and $121,000 for joint filers. The maximum amount you can contribute to an IRA for 2018 is unchanged from 2017: $5,500, plus an extra $1,000 catch-up contribution if you are age 50 or older.

Be aware that you generally must have earned income to contribute to an IRA. But if you’re married and one of you doesn’t work, the employed spouse can make a contribution into a so-called spousal IRA for the other.

You can open a traditional IRA through a bank, brokerage, mutual fund or insurance company and invest your IRA money in stocks, bonds, mutual funds, exchange-traded funds and other approved investments.

Why Save for Retirement in an IRA?

Traditional IRAs are best for people “who need an immediate tax deduction or want to defer income in the hopes that their bracket will be lower in the future,” according to Mari Adam, a certified financial planner in Boca Raton, Fla. The latter category includes people expecting to retire shortly and those who believe their income will go down in future years, she says.

SEE ALSO: How Much Can You Contribute to a Roth IRA?

The tax deduction plus the tax-deferred growth that a traditional IRA provides can help build a sizable retirement nest egg. For example, a 25-year-old who contributes $5,500 a year to a deductible IRA and has an annual return of 6% will accrue a nest egg of $902,262 at age 65. If instead he or she is in the 22% tax bracket and invests the funds in a taxable account earning a 6% annual return, the account would grow to about $643,500 by age 65. The difference is the brake that paying the IRS on each year’s earnings puts on compounded growth.

Eventually, you will have to pay taxes on your traditional IRA. Your withdrawals will be subject to ordinary income tax. On top of that, if you take the money out before turning age 59½, you can be hit with a 10% penalty. You will also be obligated to take required minimum distributions (RMDs) after you turn age 70½, so you won’t be able to avoid the IRS forever.

Roth IRAs vs. Traditional IRAs

The tax rules differ from a Roth IRA, for which contributions aren’t tax-deductible. Money instead goes into a Roth IRA after taxes have been paid on it, and you can withdraw contributions at any time free of taxes or penalties. The earnings can also be withdrawn tax- and penalty-free once you have owned the Roth for five years and you’re at least age 59½. Also, Roth IRAs don’t have required minimum distributions. The amount that can be contributed to a Roth IRA is subject to income limits.

Also, you can add funds to a Roth IRA at any age, provided you have earned income from, say, a job or self-employment. Traditional IRAs close the door to new contributions once you turn 70½, even if you’re still working.

If you can afford to contribute the full $5,500 without the help of the tax deduction (which reduces the out-of-pocket cost of a $5,500 contribution to just $4,290 for someone in the 22% bracket) you may be better off saving for retirement in a Roth IRA.

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One final note: If you invest in both a traditional IRA and a Roth IRA, the total amount of money you can contribute to both accounts can’t exceed the annual limit. If you do exceed it, the IRS might hit you with a 6% excessive-contribution penalty.