Contributing to a traditional IRA is an excellent way to save for your retirement and lower your current year taxes. In addition, the income earned on your IRA investment is deferred from taxation until withdrawn at retirement.
An individual (under age 70 1/2) who is not an active participant in an employer-sponsored retirement plan can make annual deductible contributions >>equal to the lesser of *$5,500 or 100% of the individual’s compensation. Compensation includes wages, salary, bonuses, commissions, self-employment income, certain taxable alimony or separate maintenance payments and nontaxable combat pay.
1) Wages $10,000
IRA deductible contribution: any amount up to $5,500.
2) Wages $4,500
IRA deductible contribution: any amount up to $4,500.
That’s right you don’t have to contribute the maximum to get this tax benefit!
*If an individual is age 50 or older at the end of year, an additional $1,000 can be contributed so that the total allowable amount is $6,500 (for example 1 only).
Keep in mind however, there may be a required minimum amount for opening an IRA imposed by banks, credit unions, mutual fund companies (etc.) who offer IRA accounts.
If an individual (under age 70 1/2) is covered by an Employer Retirement Plan, the contribution might be reduced or eliminated based on the individual’s filing status and modified adjusted gross income (MAGI). These factors could result in a Full, Partial or No deduction.
For 2017 returns:
Single or Head of Household
MAGI $62,000 or less: Full Deduction
MAGI $62,001-$71,999: Partial Deduction
MAGI $72,000 or more: No Deduction
Married Filing Jointly or Qualified Widow(er)
MAGI $99,000 or less: Full Deduction
MAGI $99,001-$118,999: Partial Deduction
MAGI $119,000 or more: No Deduction
Married Filing Separately
MAGI less than $10,000: Partial Deduction
MAGI $10,000 or more: No Deduction
Modified Adjusted Gross Income (MAGI) is your regular AGI plus add backs for certain other tax items. Some examples include foreign income and housing exclusions, excluded employer-provided adoption assistance, student loan interest deduction, tuition and fees deduction (among others).
IRA distributions are taxable as ordinary income in retirement. However an early withdrawal penalty of 10% of the distribution is imposed on the withdrawal if made before age 59 1/2. There are certain exceptions to this penalty (some examples: after becoming disabled, taking equal periodic distributions, unreimbursed medical expenses, cost of health insurance for certain unemployed individuals, higher education expenses, first time homeowners and a few others).
An individual may continue to make IRA contributions provided the compensation test is met, and if under age 70 1/2. However, a required minimum distribution (RMD) must begin by April 1 of the year following the year the account owner turns age 70 1/2. If distributions are not made by then a 50% excess accumulation penalty is imposed on the taxpayer.
A spouse who has very little or even no earned income can make a contribution to a traditional IRA account if that person’s spouse has earned income. The maximum combined contribution the couple can make for 2017 is the lesser of $11,000 ($5,500 for each spouse) or their combined earned income for the year, reduced by the higher earnings spouse’s contribution to a traditional IRA. The age “50 or older rule” mentioned above applies to Spousal IRA’s as well. If both spouses meet the age test then each can contribute an additional $1,000.
Another benefit of an IRA is the ability to make your contribution after the end of the tax year. Thus, 2017 IRA contributions must be made no later than April 17, 2018. Filing an extension of time does not extend this date. Additionally, taxpayers can claim an IRA deduction and file their tax returns before actually making their IRA contributions. However, the contribution must be made by the unextended due of their return (i.e. April 17, 2018 for 2017 returns).
So you still have time to take advantage of this tax benefit on your 2017 return!