February 24th, 2015 | Miller Advisors

7 things you must know about funding IRAs

Take it to the limit. Workers younger than age 50 may save up to $5,500 in a traditional IRA, a Roth or a combination of the two. If you were 50 or older at the end of last year, the ceiling is $6,500.

Choose your side. You can fund a traditional or a Roth IRA, or hedge your bets by splitting your contribution. Contributions to a traditional IRA are fully tax-deductible if you don’t have a workplace retirement plan; if you have an employer-provided plan, some or all of what you put away may be deductible. You don’t pay taxes on your earnings inside a traditional IRA, but you will owe Uncle Sam when you make withdrawals. With a Roth, nobody gets a deduction, but you don’t owe taxes on withdrawals in retirement, assuming the account has been open for at least five years. Roths have other benefits, too. You can withdraw contributions at any time free of taxes and penalties. And if there’s money in the account when you die, your heirs get it tax-free. With a traditional account, that legacy is subject to income taxes.

And now for the fine print. If you have a retirement plan at work, you’re single and your modified adjusted gross income was $60,000 or less last year (or $96,000 or less if you’re married), you still qualify for a full-fledged traditional IRA deduction. As income rises above those levels, the deduction gradually disappears. Different income limits apply for a Roth: To make even a partial deposit for 2014, your MAGI must have been less than $129,000 for singles or $191,000 for married couples.

Double up your savings. You usually need earned income (wages from a job, for example, but not income from investments) to put money in an IRA. But if you didn’t draw a salary in 2014-say, because you stayed at home with the kids-Uncle Sam allows you to open a so-called spousal IRA and put away up to $5,500 using your spouse’s pay. (The limit is $6,500 if you’re 50 or older.)

Jump-start Junior’s retirement. Children must earn their own money to fund an IRA, but their own money doesn’t have to fund the account. If your 15-year-old daughter had a summer job in 2014, you can contribute to an IRA in her name, up to her total earnings (or the $5,500 cap, whichever is less). Go with a Roth. Your child is likely in a low tax bracket and doesn’t need the up-front deduction. Fifty years from now, when her hair is turning gray, a single $5,500 contribution will have grown to more than $160,000, assuming an annualized return of 7%.

Good news if you’re on your own. If you’re self-employed-whether full-time or because you do freelance work on the side-you qualify for a simplified employee pension plan, or SEP-IRA. Contribution amounts are much larger-as much as 25% of your qualified earnings, up to a maximum of $52,000 for 2014. And if you file for an extension on your tax return, you have until October 15 to make a 2014 contribution to your SEP account. With traditional IRAs and Roths, April 15 is the last day to make a deposit for 2014, whether you file a return that day or not.

Get a leg up on 2015. You don’t have to wait until April 15, 2016, to make this year’s contribution. In fact, delaying means missing out on more than a year’s worth of tax-free compounding.

Source: Carolyn Bigda, from Kiplinger’s Personal Finance