It must be January because instead of holiday cards, my mailbox is full of tax documents (and the usual array of bills). So, I figured this would be a good time to cover a tax topic in our weekly column. Everyone wants to minimize his or her taxes, and one way to do this is to contribute as much as possible to tax-deferred retirement plans. The company-sponsored varieties (e.g., 401k, 403b, 457, SEP & Simple IRA) are all great because they have high contribution limits, and you can systematically add to them from every paycheck. However, you can always use the good old-fashioned traditional IRA if your company does not offer a plan. This week, I answer the most frequently asked questions related to IRA contributions:
- Can I contribute to an IRA if I do not have any income?
No. You must have earned income (e.g., wages, bonuses, commissions). Social Security, pensions, and investment income are not considered earned income. There is one exception to the earned income requirement, which is if your spouse has earned income. Both spouses can contribute to an IRA as long as one spouse has earned income.
- How much can I contribute to an IRA?
$5,500 if you are under 50 and $6,500 if you are 50 or above. You must have at least as much earned income as the amount you contribute. For example, you could only contribute $3,000, if that was all you earned for the year.
- Can I contribute to a traditional IRA and a ROTH IRA?
You can contribute to either or both, but the total annual contribution limit is the same. In other words, if you are under 50, you can contribute $5,500 to either a traditional IRA or a ROTH, or you can split it between the two. You cannot contribute $5,500 to each.
- Can I contribute to an IRA if I am over 70½?
No. You cannot contribute to a traditional IRA after 70½. However, you can contribute to a ROTH IRA or a company retirement plan (e.g., 401k) at any age as long as you have earned income.
- Is there a limit to how much I can make and still contribute to an IRA?
There is no earnings limit. So, if you earn $1 million, you can still get your $5,500 or $6,500 deduction. The bad news is you are still going to pay a boatload of taxes.
- When is the IRA Contribution deadline?
April 15th is the deadline for the prior year. So, you still have almost 3 months to make your 2016 contribution. The IRS gives you until the following Monday in years that April 15th falls on a weekend, as it does this year.
- Can I contribute to an IRA if I also contribute to a 401k or other company-sponsored retirement plan?
Yes, you can contribute, but before you do, let’s make sure the deduction is going to be tax-deductible. Your contribution will not be deductible if you are an “active participant” in a company-sponsored retirement plan and you earn above the following thresholds:
|IRA AGI Limits||2017||2016|
|Single||$62,000 to $72,000||$61,000 to $71,000|
|Joint (MFJ)||$99,000 to $119,000||$98,000 to $118,000|
|Contribution for non-participating spouse||$186,000 to $196,000||$184,000 to $194,000|
I hate non-deductible IRA contributions! They complicate the rest of your life because once you have both before- and after-tax contributions in an IRA, you are responsible for tracking the proportion of the total IRA balances upon which you have already paid taxes. To make matters worse, you have to consider all of your IRA accounts in aggregate. Every distribution from any of your IRA accounts will then be considered partially taxable and partially a return of your after-tax contributions. The custodians (company that holds your account) do not track this. Your 1099 will show the entire distribution being taxable, and then you have to report it differently on your tax-return and be prepared with the documentation if you get audited.
You also must use the proportionality of before- to after-tax dollars if you want to convert any of your IRAs to a ROTH. Trust me, this is a total nightmare and goes on for the rest of your life and then transfers to your beneficiary. In many cases, the beneficiary does not know about this and ends up paying tax again when ultimately withdrawing your after-tax contributions. So, the morale of this story is: Do not make non-deductible IRA contributions.
Questions? Comments? Concerns? Email us. We are here to help.