Last Week’s Question of the Week: With an after-tax investment, is the “cost basis” what you EARNED on the investment, or what you PAID for the investment?
ANSWER: Cost basis is what you paid to purchase an investment.
HOST: So we talk on this show about the various retirement accounts that people can save into, and today it sounds like we are talking about IRAs and maybe about still adding to them yet this year?
KLAAS FINANCIAL: Yes, we want our listeners who are in the thick of retirement planning and working on their taxes, it is important to understand that there are different types of IRA’s available to them as they are putting money away for retirement.
For both 2017 & 2018 the contribution limits have remained the same. If you are under 50, you can contribute up to $5500, and if you are over 50, $6500.
Remember you cannot contribute to a Traditional IRA after the age of 70.5 BUT you CAN contribute to a 401k after age 70.5, if still employed with firm and not a 5% or more owner of firm.
HOST: If I want to contribute for tax year 2017, is it too late?
KLAAS FINANCIAL: No, if you haven’t filed your taxes yet you can still contribute for last year up until April 17, 2018, the day that 2017 tax returns are due. This should reduce your taxable income if it is put into a traditional IRA; a Roth IRA contribution will require you to pay taxes today.
Things to remember:
- First, the limit is per person, not per account. You can have more than one IRA , perhaps a traditional IRA and a Roth IRA — but your total contributions for 2017 or 2018 cannot exceed the limit.
- Second, although the limit is for 2018, there’s actually a longer window in which you’re allowed to make your contributions. Specifically, you have until each year’s tax deadline to make your IRA contributions. For 2018, this means you can make your contributions from January 1, 2018 through April 15, 2019.
- You do have to have earned income for the year to be able to add money into an IRA. Also remember, Spousal IRA’s for non-working spouse. If you have a non-working spouse, you can contribute on their behalf up to the allowed limit. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return.
HOST: Do most people have an IRA account? And how long have IRAs been around?
KLAAS FINANCIAL: Hopefully, everyone has some type of retirement savings account, whether it is a retirement plan at work, a 401k, 403b, a pension or an IRA.
Interesting fact, only 33% percent of Americans have an IRA.* That’s the latest tally from TIAA’s (Teachers Insurance and Annuity Association), survey from January 2017.
IRAs have been around for more than four decades. They were first introduced back in 1974, and at the time, the annual contribution limit was just $1,500 per person. Currently, it’s up to $5,500/$6500.
HOST: So besides traditional and Roth, what are the other IRAs available?
KLAAS FINANCIAL: Yes, there are IRAs called SIMPLE and SEP IRAs as well.
A Simple IRA plan provides small employers with a simplified method to contribute toward their employees’ and their own retirement savings. Employees may choose to make salary reduction contributions and the employer is required to make either matching or nonelective contributions. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SIMPLE IRA). Limits are $12,500 with a $3000 catch-up provision for over 50 in 2017. These limits remain the same in 2018.
A SEP IRA plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed can contribute. The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of 25% of compensation, or $54,000 for 2017. In 2018 the limits have increased to $55,000.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.
