A lot of us millennials are familiar with putting money into a Traditional or Roth IRA for retirement savings. When we first started working, contributing the max amount ($5,500 for 2014) into an IRA was nearly impossible for us and our entry-level salaries. But as we work our way up the corporate ladder, we will start to experience “rich people problems” such as making too much money for IRAs. Let me explain…
First, you have your Traditional IRAs. For someone who is single (for tax purposes), the phase-out for 2014 begins at $60,000 and ends at $70,000. What this means is that if your Adjusted Gross Income in 2014 is $60,000 or less, you can deduct the full amount you put into your Traditional IRA (on line 32). If your AGI is $70,000 or more, you can’t deduct anything that you put into your Traditional IRA. And if your AGI is somewhere between $60k-$70k, you can deduct part of the amount you put into your Traditional IRA. Fidelity has a simple calculator that you can use to see how much of a deduction you can take. Click “yes” under the Employer-Sponsored Plan section if you have a 401k with your employer.
Next, you have your Roth IRAs. For a single person in 2014, the phase-out begins at $114,000 and ends at $129,000. The reason why the phase-out limit is so much higher for Roth IRAs than Traditional IRAs is because with Roth IRAs, you do not get an immediate tax deduction regardless. That’s just not how Roth IRAs work. So the phase-out is for whether or not you can even contribute to the account and if so, how much. If your AGI is $114k or less, you can contribute up to the max ($5,500 for 2014). If it’s $129,000 or more, you can’t contribute anything. If you fall within the phase-out range, you can contribute up to a specific amount. You can use the calculator provided above to see what that amount is.
And lastly, you have your Non-Deductible IRAs. There is no phase-out for Non-Deductible IRAs because it works like a Traditional IRA without the immediate tax benefits. This IRA is appropriate for people who have an AGI over the phase-out limits for both Traditional and Roth IRAs but still want to take advantage of the tax-free growth. So even though you don’t get to deduct your contribution on your tax return, you still don’t have to pay taxes on your account’s earnings each year.