Wednesday, January 11, 2017

Traditional IRA contributions

Many tax planning deductions for 2016 are no longer available after the year end. However, there is one you might consider up until April 15th, 2017, and that is making a contribution to a traditional IRA. Contributions to these accounts mean you don’t have to pay tax on any earnings on the account until you withdraw the money and, depending on your circumstances, you may be entitled to a tax deduction for the contributions.
Here are the basics to help you determine whether or not you are eligible:
You must be under age 70 and a half at the end of the tax year in order to contribute to a traditional IRA.
You must have taxable compensation, and enough of it to cover the contribution you would like to make. Salary is considered compensation. Usually it is box 1 of your W-2. Other examples of compensation include tips, commissions, bonuses, and self employment income.
If your spouse isn’t working, the nonworking spouse may count the working spouse’s compensation as his or her own in deciding if a contribution may be made. As long as the compensation is enough to cover both/any spouses’ contributions, the compensation requirement is met. The filing of a joint tax return is needed in this case.
If you do not have a retirement plan at work, then there are no adjusted gross income (AGI) limits to review before making your contribution.
If you are covered by a retirement plan at work, then there are limits to consider. One quick way to see if you are covered by a plan is to refer to your W-2 again. If the retirement plan box on the W-2 is checked, then you are covered.
Being covered by a plan means your ability to make a deductible IRA contribution is potentially limited as determined by your (AGI). If your filing status is married filing jointly, the ability to make a contribution starts to phase out at $98,000 and is completely gone at $118,000 of AGI for the tax year 2016. For single taxpayers, the phase out range is $61,000 to $71,000. If you are married filing jointly, and only one of you is covered by a pension plan at work, the phase out range is $184,000 to $194,000.
For 2016, the maximum amount that can be contributed to an IRA is $5,500. For individuals who are age 50 by year end, there is an additional catch up contribution of $1,000.
If you make an IRA contribution, you may also qualify for the Savers Credit (Retirement Savings Contributions Credit). The credit can reduce your taxes up to $1,000 ($2,000 if filing jointly). Use From 8880, Credit for Qualified Retirement Savings Contributions, to claim the Saver’s Credit.
You may have your income tax refund directly deposited into an IRA. See line 76a on page 2 of your Form 1040. If you would like to split your refund between accounts, Form 8888, Allocation of Refund will allow you to do this. Note the IRA account needs to be set up in advance and you need to tell the IRA custodian which year the contribution applies to. Using your refund for this purpose does not extend the deadline for making the IRA contribution. Start early to complete the process in time. The IRS web site at www.irs.gov has more details.
As can be seen, the rules for Traditional IRA contributions can be complex. You might want to check out IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), for more information. The form is available on the IRA website, www.IRS.gov. If you are unsure if you are eligible, or are questioning any of the rules, please check with your personal tax adviser.