You’re likely aware that April 17 is significant this year because it is tax day—the deadline for individual income tax returns for 2017 to be turned into federal and state governments. However, the IRS has recently reminded taxpayers of another reason to note April 17 on their calendars: it is the last day to contribute to an IRA to claim it for 2017. April 17 is important for IRA contributors to take advantage of the tax benefits of both traditional and Roth IRAs.
According to Forbes, only 14 percent of households contribute to an IRA in any given year. However, more than 36 percent of IRA contributions were made in the three weeks leading up to tax day in the last two years, Fidelity Investments reports. This data shows that many IRA contributors do so last minute.
How much can I contribute?
For the 2017 tax year, you can contribute up to $5,500 to an IRA or Roth IRA. If you are 50 and older, you get an additional catch-up contribution of $1,000, so you can contribute a total of $6,500. You can contribute to a traditional IRA so long as you are younger than 70.5. You can contribute to a Roth IRA at any age if you have earnings.
What are the deduction limits for traditional IRAs?
The deductibility of a contribution made to an IRA is based on income limits. If you do not have a workplace savings plan, then you can deduct the full contribution amount regardless of your income.
For the 2017 tax year, deduction limits for taxpayers making contributions to a traditional IRA who are filing singly or as heads of household (and who are covered by a workplace retirement plan) is a modified adjusted gross income between $62,000 and $72,000. For married couples filing jointly when the spouse who makes the contribution is covered by a workplace retirement plan, the limit is $99,000 to $119,000. For a contributor who is not covered by a workplace retirement plan, but is married to someone who is covered, the limit is between $186,000 and $196,000. See this IRS chart for specifics on what types of deductions you are eligible for. Roth IRAs have their own deduction limits.
Why should I contribute to an IRA?
An IRA is one type of tax-advantaged option for saving for retirement. Especially if you do not have an employer-sponsored plan, or if you are self-employed, an IRA is a smart way to set money aside for retirement and have it grow at a reasonable rate.
Money placed in an IRA has the ability to compound, which is what happens when an investment earns a return. Then, the gains on the initial investment are reinvested and start earning returns of their own.
In addition to growth potential, the other advantage of contributing to an IRA is the tax advantages it offers. With a traditional IRA, earnings can grow tax-deferred. Then, you will be taxed when you make withdrawals in retirement. Conversely, contributions to a Roth IRA are taxed, but then you do not have to pay taxes on qualified withdrawals in retirement.
The bottom line is, April 17 is important for IRA contributors to make their final contributions of the year—and to contribute the maximum if they are able. Next year, don’t wait until the deadline to contribute. Make contributing to your IRA a regular occurrence throughout the year to maximize the amount you are setting aside for retirement.
For more retirement-related advice and insight, continue to follow Ty J. Young Inc.’s Retirement You Earned blog! To learn how you can maximize the amount of income you receive in retirement, call our knowledgeable Ty J. Young Inc. advisors today at 877-912-1919.