7 Secret Perks of Individual Retirement Accounts

7 Secret Perks of Individual Retirement Accounts
Photo by Dean Drobot / Shutterstock.com

There are all sorts of places you can save money for retirement if you don’t have a 401(k) or other workplace retirement plan: savings accounts, brokerage accounts, money under your mattress. However, few can compare with an individual retirement account.

IRAs share some key features — such as tax advantages and the ability to invest your savings — with certain other types of accounts. But IRAs also offer several lesser-known perks — some of which you won’t find in any other type of account.

Let’s take a closer look at some of the benefits of IRAs that you might not know exist.

1. There is no age limit on contributions (Roth IRAs only)

There are two main types of IRAs: Roth and traditional.

Roth IRAs let you put after-tax money aside, so you can withdraw both the contributions and their earnings tax-free in retirement, provided you follow IRS rules for withdrawals. Traditional IRA’s contributions are tax-deductible in the year for which you make them, but both contributions and earnings are taxable in the year for which they’re withdrawn.

Some little-known perks of IRAs are unique to one type of IRA or the other. One perk that’s unique to Roth IRAs is the lack of an age limit on contributions.

With a traditional IRA and some other types of retirement accounts, you cannot contribute to the account in the year in which you reach age 70½ or thereafter. However, with a Roth IRA, you can make contributions at any age, provided that you or your spouse is earning income and you’re otherwise eligible to contribute.

2. There are no required minimum distributions (Roth IRAs only)

Generally, you must begin taking required minimum distributions (RMDs) from most types of retirement accounts — including traditional IRAs — after you turn age 70½. However, Roth IRAs have no RMDs.

Even better, withdrawals from a Roth IRA aren’t considered part of your combined income, an amount that determines whether your Social Security benefits are taxable and, if so, to what extent. That’s one more reason to love Roth accounts, says Greg Hammer, president of Hammer Financial Group in Schererville, Indiana.

“The Roth IRA, in my opinion, is one of the most flexible, advantageous savings vehicles to use,” he tells Money Talks News.

3. You could earn tax credits for contributions

Deposit money in a traditional IRA and you could get a tax deduction plus a tax credit thanks to a little-known tax break called the Saver’s Credit. Even contributions to Roth IRAs, which aren’t tax-deductible, could allow you to claim the Saver’s Credit.

Adults who aren’t full-time students, aren’t claimed as dependents and make contributions to certain types of retirement accounts — including Roth and traditional IRAs — may be eligible for the credit.

Depending on your income, the credit is equal to 10%, 20% or 50% of your total contribution. So if you contribute $6,000 to an IRA this year and qualify for the Saver’s Credit, it could slash your 2019 tax bill by $600 to $3,000.

For tax year 2019, you may qualify for the credit if your adjusted gross income is:

  • $64,000 or less — for couples filing jointly
  • $48,000 or less — for people whose tax-filing status is head of household
  • $32,000 or less — for everyone else

4. You have until Tax Day to contribute

You generally have until Dec. 31 of each tax year to contribute to a workplace retirement account. But the IRS gives you until Tax Day to make your annual contribution to an IRA, whether Roth or traditional.

That’s true even if you file your taxes before you make the contribution, as we detail in “75% of Americans Don’t Realize This Tax Strategy Is Legal.”

For example, to make a contribution to an IRA for the 2019 tax year, you have until April 15, 2020 — even if you file your tax return as early as January 2020.

You can acknowledge a pending contribution on your 2019 return and then make the contribution after filing your taxes. Or, if you come into some money after filing and want to put it in an IRA, you could do so and file an amended tax return.

5. Spouses can contribute even if one doesn’t work

Stay-at-home spouses make many sacrifices to raise the kids and keep the house in order, but they don’t have to give up saving for retirement.

Married couples who file a joint tax return can contribute to an IRA for each spouse even if only one person works, assuming they are otherwise eligible to contribute to an IRA.

That instantly doubles the amount a family can save for retirement through IRAs — whether Roth or traditional.

For example, for tax year 2019, if only one person in an eligible couple works, the couple can contribute a total of $12,000 rather than $6,000 to IRAs.

People who are 50 or older can also contribute an extra $1,000 as a so-called catch-up contribution. So a couple in their 50s, for example, could contribute a total of $14,000 to an IRA this year, even if only one person works.

6. You can use the money to buy a house

The government frowns upon people raiding their retirement accounts for reasons other than retirement. So Uncle Sam generally assesses a 10% penalty on withdrawals made before age 59½.

However, you may be able to avoid that penalty in certain circumstances — which may include buying your first home. Qualified first-time homebuyers generally can withdraw up to $10,000 from an IRA to help pay for the expense.

“It does increase the odds of being audited, so you absolutely want to keep documentation,” Hammer says.

Another option is to withdraw the principal — your contributions — from a Roth IRA. Since contributions to a Roth account have already been taxed, they generally can be withdrawn at any time without penalty.

Of course, just because you can withdraw money from an IRA early and avoid the penalty, it doesn’t mean you should. The longer you let contributions or earnings sit untouched, the more earnings they can generate for you — which means the bigger your nest egg will be by the time you retire.

7. You can use the money for college

Another circumstance in which you may be able to withdraw money from an IRA early and avoid the penalty is to pay for higher-education expenses.

You generally also have the option to withdraw contributions from a Roth IRA at any time to pay for college costs. That’s one reason Hammer says he advises his clients to consider whether it makes more sense to fund a Roth IRA in lieu of a 529 college savings plan.

“Roth IRAs allow the flexibility that if your child is not going to college, you’ve just added money to your retirement plan,” he says.

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