Should I contribute to traditional IRA or Roth IRA for 2024?

[sunshineInTheRain]

I am unemployed for the first 4 months of 2024 and have some interest and dividend income. So far, my annual income will be around 20K if I remain unemployed. However, I may get a job later in the year, and my annual income may be bumped above 87K for 2024.

I was wondering if I should contribute to a traditional IRA or Roth IRA? What will happen if I end up making more than 87K? I already have some traditional IRA from previous years and I will get hit by the pro-rata rule if I want to convert my 2024's IRA contribution to Roth IRA.

[Bsch4477]

You don’t have to contribute to a 2024 IRA until April 15, 2025 so wait to see what your 2024 income will actually is. 

[SteamTrain]

AND...generally, you cannot contribute to an IRA or Roth IRA unless you have working income for the year.  Investment income like interest, dividends, capital gains and your Unemployment doesn't count.

Sometimes a nonworking spouse can contribute if the other spouse has working income, but not if you are single.

[Opus 17]

1. To make any IRA contribution, you must have compensation from working, or your spouse must have compensation from working.

2. You can wait and see, because the deadline for contributions for 2024 is April 15, 2025.  Also, if you never go back to work and your contributions are ineligible (excess) you have until April 15 to remove them without penalty.  (Just pay income tax on the earnings.)

3. Or, if you want to contribute now, you have until April 15, 2025 to recharacterize a traditional Roth contribution to a traditional IRA contribution or vice versa. Recharacterzing is different than converting.

4. In addition to recharacterizing, a Roth contribution can always be withdrawn tax-free, either because you just want the money, or to correct an over-contribution situation.

5. If you are single, at the $87K income level, you will be in the 22% tax bracket.  Do you think your income tax in retirement would be higher or lower than 22%?  (That may be hard to guess.  It depends on your type of income and what state you plan to live in.). If you are married, you would be in the 12% bracket.  Do you think your income tax in retirement would be higher or lower than 12%?

If you want to contribute now, a Roth IRA gives you the easiest options to change your mind later, depending on your financial situation and what you are eligible to do.  

a. You can leave it alone.

b. You can withdraw the money as a regular withdrawal. Contributions you withdraw are tax-free and penalty free.  Earnings you withdraw are subject to regular income tax plus a 10% penalty.

c. You can withdraw the money as withdrawal of excess contribution, if you are not eligible to make any IRA contribution.  This must be done by April 15, the withdrawal is non-taxable but you also must withdraw the earnings which are taxable. 

d. You can recharacterize the contribution as a traditional IRA contribution (if you are not eligible to contribute to a Roth or if you want the tax deduction and are eligible for it).  The contribution becomes a tax deduction (if you are eligible), and the earnings go into the IRA tax-free, to be taxed when you withdraw after you retire.