There’s Still Time to Max Out Your IRA Contribution for 2016Share
If you’re one of the many people who did not make the maximum allowable contribution to your IRA for tax year 2016, here’s some good news: there’s still time to do so! Yes, the calendar does now say “2017,” but the rules regarding IRAs offer flexibility by allowing you to take advantage of the tax benefits of these accounts all the way up to the filing deadline for a particular tax year.
While the IRS will grant an automatic extension of the filing deadline, the extra time allowed does not apply to the contribution deadline for IRAs. Whether tax returns are completed by the standard deadline or later, only contributions made by April 18, 2017 can be applied to tax year 2016.
There are two types of IRAs: Traditional and Roth. In order to qualify for a Traditional or a Roth IRA, you must have earned income and/or alimony during the tax year in which you’d like to contribute. Please note that investment income does not count.
The rules for Traditional IRAs are as follows:
1) Anybody, regardless of their Modified Adjusted Gross Income (MAGI), can contribute to a Traditional IRA.
2) The maximum contribution cannot exceed $5,500 ($6,500 if 50 years of age or older).
3) There are MAGI limitations that determine the deductible portion of the contribution, but please note that there are no MAGI limitations on the amount that you can contribute.
For Traditional deductible IRAs, the full deduction can always be claimed on the tax return if a single taxpayer (or a married taxpayer and their spouse) does not have a retirement plan through his or her employer. For taxpayers covered by an employer’s retirement plan, the full deduction is allowed for a single taxpayer with MAGI equal to or less than $61,000 and a Married Filing Joint (MFJ) taxpayer with MAGI of equal to or less than $98,000. In both scenarios, limitations exist above and beyond these MAGI limitations. Special limitations apply in various situations, for example a nonworking spouse may be allowed to contribute to an IRA. Refer to the IRS website for more information.
The rules for contributing to a Roth IRA are a slightly different story. You must still have earned income (or alimony) as mentioned above, and your eligibility does depend on MAGI limitations. For Roth IRAs, the contribution amounts will be limited if MAGI is in excess of $117,000 if you are a single taxpayer ($184,000 if you are a MFJ taxpayer). Please note, contributions to Roth IRAs are never deductible. The payments are made with after-tax dollars, so contributions into these accounts do not impact taxable income. The advantage is that when Roth IRA funds are distributed, either in retirement or before, the distributions are normally tax-free.
Nearing 70 1⁄2 years of age? Keep in mind that you can no longer contribute to a Traditional IRA beginning with the year you turn 70 1⁄2. However, this limitation does not apply to Roth IRA contributions. Additionally, make certain you consider the Required Minimum Distribution (RMD) rules. Upon turning 70 1⁄2, taxpayers are required to take RMDs from their retirement account. Roth IRAs are excluded from this rule as well. In order to calculate the RMD for a particular tax year, the taxpayer must use the Uniform Lifetime Table found on the IRS website. The amount of the RMD will be included in taxable income unless there is a portion of the RMD that was previously taxed. Failure to take an RMD subjects taxpayers to a penalty of 50% of the RMD not taken.
The favorable tax treatment given to retirement account contributions makes them an especially important strategy for building savings while simultaneously reducing tax liability. For workers whose employers offer 401(k) or other retirement savings plan matching funds, it is usually best to utilize these plans before contributing to an IRA.
With the additional time allowed for contributions to Traditional deductible IRAs, these taxpayers have the opportunity to add additional funds to reduce their taxable income before filing returns. IRS regulations even allow you to claim the deduction before you actually make the contribution. That means it is possible to use your 2016 tax refund to pay for the deduction you’re claiming on the return. It’s a great deal, but if you go that route, be sure to get the money you claim as a contribution into your IRA before the deadline, or you’ll need to file an amended return.
Each time you contribute to an IRA during the months of January, February, March or April up to the filing deadline for that year, you should clearly communicate to your account manager which tax year you want the contribution to count towards – the previous calendar year or the current one. That’s because contributions made during this period can be applied to either year, but not both. Depending on your income, tax liabilities and other retirement contributions in each respective year, it may be more beneficial to count it to one or the other. Be sure to contact a trusted tax professional in order to determine which tax year to deduct the contribution.
From contribution limitations, choice of Traditional versus Roth IRA, loans from IRAs, “back-door” Roth IRAs, IRA rollovers, etc., IRA rules are very complex. IRA accounts offer a variety of advantages to taxpayers who are saving for retirement and look to minimize their tax obligations. To learn how you can maximize the benefits of an IRA, please feel free to contact the tax experts at AGH.
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