Did you contribute to an Individual Retirement Arrangement last year? Are you thinking about contributing to your IRA now? Have you done your taxes and aren’t happy with your bottom line? If so, you may have questions about IRAs and your taxes. Here are some IRS tax tips about saving for retirement using an IRA. Contributing to an IRA is one of the only things you can still do today that will affect last year’s tax return.
Age Rules. You must be under age 70½ at the end of the tax year in order to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.
Compensation Rules. You must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income. It also includes tips, commissions, bonuses and alimony. If you are married and file a joint tax return, only one spouse needs to have compensation in most cases.
When to Contribute. You can contribute to an IRA at any time during the year. To count for 2016, you must contribute by the due date of your tax return. This does not include extensions. This means most people must contribute by April 18, 2017. If you contribute between Jan. 1 and April 18, make sure your plan sponsor applies it to the year you choose (2016 or 2017).
Contribution Limits. In general, the most you can contribute to your IRA for 2016 is the smaller of either your taxable compensation for the year or $5,500. If you were age 50 or older at the end of 2016, the maximum you can contribute increases to $6,500. If you contribute more than these limits, an additional tax will apply. The additional tax is six percent of the excess amount contributed that is in your account at the end of the year.
Taxability Rules. You normally don’t pay income tax on funds in your traditional IRA until you start taking distributions from it. Qualified distributions from a Roth IRA are tax-free.
Deductibility Rules. You may be able to deduct some or all of your contributions to your traditional IRA.
Saver’s Credit. If you contribute to an IRA you may also qualify for the Savers Credit. It can reduce your taxes up to $2,000 if you file a joint return.
Unsure whether you can or should contribute to an IRA? Call us, we’re always happy to help with your tax planning!