Taxpayers often have questions about Individual Retirement Arrangements or IRAs. Common questions include: When can a person contribute, how does an IRA impact taxes, and what are other common rules. If you have questions, here's what you need to know:
Age Rules. Taxpayers must be under age 70 1/2 at the end of the tax year to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.
Compensation Rules. A taxpayer 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 a taxpayer is married and files a joint tax return, only one spouse needs to have compensation in most cases.
When to Contribute. Taxpayers may contribute to an IRA at any time during the year. To count for 2016, a person must contribute by the due date of their tax return. This does not include extensions. This means most people must contribute by April 18, 2017. Taxpayers who contribute between January 1 and April 18 need to advise the plan sponsor of year they wish to apply the contribution (2016 or 2017).
Contribution Limits. Generally, the most a taxpayer can contribute to their IRA for 2016 is the smaller of either their taxable compensation for the year or $5,500. If the taxpayer is 50 or older at the end of 2016, the maximum amount they may contribute increases to $6,500. If a person contributes more than these limits, an additional tax will apply. The additional tax is six percent of the excess amount contributed that is in their account at the end of the year.
Taxability Rules. Normally taxpayers don't pay income tax on funds in a traditional IRA until they start taking distributions from it. Qualified distributions from a Roth IRA are tax-free.
Deductibility Rules. Taxpayers may be able to deduct some or all of their contributions to their traditional IRA. Please contact the office for details.
Saver's Credit. A taxpayer who contributes to an IRA may also qualify for the Saver's Credit. It can reduce a person's taxes up to $2,000 if they file a joint return. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. A taxpayer may file either Form 1040A or 1040 to claim the Saver's Credit.
Rollovers of Retirement Plan and IRA Distributions. When taxpayers roll over a retirement plan distribution, they generally don't pay tax on it until they withdraw it from the new plan. If they don't roll over their distribution, it will be taxable (other than qualified Roth distributions and any amounts already taxed). The payment may also be subject to additional tax unless the taxpayer is eligible for one of the exceptions to the 10 percent additional tax on early distributions.
myRA. If a taxpayer's employer does not offer a retirement plan, they may want to consider a myRA. This is a retirement savings plan offered by the U.S. Department of the Treasury. It's safe and affordable. Taxpayers may also direct deposit their entire refund or a portion of it into an existing myRA.
Keep a copy of your tax return. Beginning in 2017, you may need your Adjusted Gross Income (AGI) amount from a prior-year tax return to verify your identity. You can find your AGI on line 37 of your 2015 tax return. If you don't have a copy of your tax return and you need assistance obtaining a copy of last year's tax return, don't hesitate to call.