If you weren’t already aware, in general, contributions made to a Traditional IRA (individual retirement account) are tax-deductible if you or your spouse are not covered by a retirement plan at work. For 2016 and 2017, the annual contribution limit for a traditional IRA is $5,500, or $6,500 if you’re age 50 or older. Contribution limits do not apply to rollovers. You can continue to make contributions through age 70½ as long as you receive some form of taxable compensation from wages, salaries, tips, and other taxable employee pay.
For 2017, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced, also called “phased out,” if your modified AGI is:
- More than $98,000 but less than $118,000 for a married couple filing a joint return or a qualifying widow(er),
- More than $61,000 but less than $71,000 for a single individual or head of household, or
- Less than $10,000 for a married individual filing a separate return.
If you are married and your spouse is covered by a retirement plan at work and you are not, and you live with your spouse or file a joint return, your 2017 deduction is phased out if your modified adjusted gross income (AGI) is more than $186,000 (up from $184,000 for 2016) but less than $196,000 (up from $194,000 for 2016). If your modified AGI is $194,000 or more, you cannot take a deduction for contributions to a traditional IRA.
You can contribute to your traditional IRA at any time of the year. Unlike other retirement products, though, you can contribute to your traditional IRA at any time until the due date for filing your individual income tax return (not including extensions). If you haven’t met the contribution limit for 2016, you can make contributions now for the 2016 year until April 18, 2017. If you make a contribution this year for 2016, make sure your financial institution records your contribution in the correct tax year. Typically, financial institutions will apply contributions to the calendar year in which they are received unless you indicate otherwise.
With the deferred tax benefits and the available tax deductions, making contributions to your IRA now can be advantageous for your 2016 tax return. Until you begin taking distributions from your IRA, you generally will not pay income tax on the funds you contribute, and in some cases, certain amounts are not taxed at all. Your IRA may also earn interest, and while interest earned from your IRA is generally not taxed in the year earned, it is not tax-exempt. It is tax deferred. Distributions from your IRA will include accumulated earnings, and will be taxed as distributions are made. Do not report interest earned from your IRA on your tax return as tax-exempt interest.
You may also qualify for the Savers Credit, formerly called the Retirement Savings Contributions Credit, due to your IRA contributions. The credit can reduce your taxes up to $1,000, or up to $2,000 if you file a joint tax return. If you qualify for the Savers Credit, file Form 8880 with your Form 1040 or Form 1040A.
If you exceeded the 2016 IRA contribution limit, you may withdraw your excess contributions from your account before the filing deadline without penalty or tax. If you leave excess amounts in your account, you must pay a 6% penalty tax each year on those funds. Check with your IRA plan sponsor to make sure that no excess contributions remain in the account to be taxed before they are distributed to you in the future.
If you turned age 70½ in 2016, you must take a required minimum distribution from your IRA before April 1, 2017. Worksheets provided by the IRS can help you calculate your required minimum distribution amount, or you can contact your CPA for more information. You must calculate your required minimum distribution separately for each traditional IRA that you own. If you neglect to take a required minimum distribution on time, you will face a 50% excise tax on the amount not distributed.
Traditional IRAs have intricate rules, and it’s important to have a trusted advisor help you navigate the ins and outs. Contact your financial advisor, IRA plan sponsor, accountant, or us at Crippen today to determine the best way to save for retirement while also planning for your taxes.