Mar 01, 2017
Individual Retirement Accounts (IRAs) are among the most common accounts used for retirement savings. Almost anyone can have one and they offer great tax advantages. Here are six facts about Traditional IRAs everyone should know.
Fact 1: You can contribute up to $5,500 to a Traditional IRA ($6,500 if age 50 or older) for 2016 and 2017, as long as your taxable compensation for the year was at least that much.
Fact 2: Non-working spouses can contribute to Traditional IRAs as long as the couple files a joint return and the working spouse’s compensation equals or exceeds the sum of the non-working spouse’s contribution and the working spouse’s contribution.
Fact 3: When you contribute to a Traditional IRA, you may be able to deduct some or all of your contributions from your taxable income.
Fact 4: Your income level can limit your IRA tax benefit. There is no income limit for Traditional IRA contributions, but not everyone is eligible to receive a tax deduction. If you are covered by an employer-sponsored retirement plan, such as a 401(k), your deduction may be limited. For 2016, single taxpayers can take a full deduction with modified adjusted gross income (MAGI) up to $61,000 and a partial deduction up to $71,000 ($62,000 – 72,000 in 2017). Married taxpayers filing jointly can take a full deduction with MAGI up to $98,000 and a partial deduction up to $118,000 ($99,000 – 119,000 in 2017).
Fact 5: Everyone can consider making a contribution. Even if your income exceeds the deduction limits, you can still make nondeductible contributions. Those nondeductible contributions may be withdrawn tax-free when you take distributions in retirement. Since you effectively paid taxes on the money in the year of the contribution, you do not have to pay taxes again later.
Fact 6: You may be able to make contributions for a prior year. You have until the tax return filing deadline (not including extensions) to make IRA contributions for the tax year. Therefore, you have until April 18, 2017, to make contributions for 2016.
Of course, there are other considerations when determining if a Traditional IRA is right for you. The accountants and advisors at Terry Lockridge & Dunn and World Trend Financial can help answer questions regarding your specific circumstances. We can be reached in Cedar Rapids at 319-364-2945 or in Iowa City at 319-339-4884.