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Tax Time Guide: Still Time to Contribute to an IRA for 2016
WASHINGTON — The Internal Revenue Service today reminded taxpayers that they still have time to contribute to an IRA for 2016 and, in many cases, qualify for a deduction or even a tax credit.
This is the eighth in a series of 10 IRS tips called the Tax Time Guide. These tips are designed to help taxpayers navigate common tax issues as this year’s tax deadline approaches.
Available in one form or another since the mid-1970s, individual retirement arrangements (IRAs) are designed to enable employees and the self-employed to save for retirement. Contributions to traditional IRAs are often deductible, but distributions, usually after age 59½, are generally taxable. Though contributions to Roth IRAs are not deductible, qualified distributions, usually after age 59½, are tax-free. Those with traditional IRAs must begin receiving distributions by April 1 of the year following the year they turn 70½, but there is no similar requirement for Roth IRAs.
Most taxpayers with qualifying income are either eligible to set up a traditional or Roth IRA or add money to an existing account. To count for a 2016 tax return, contributions must be made by April 18, 2017. In addition, low- and moderate-income taxpayers making these contributions may also qualify for the saver’s credit when they complete their 2016 tax returns.
Generally, eligible taxpayers can contribute up to $5,500 to an IRA. For someone who was at least age 50 at the end of 2016, the limit is increased to $6,500. There’s no age limit for those contributing to a Roth IRA, but anyone who was at least age 70½ at the end of 2016 is barred from making contributions to a traditional IRA for 2016 and subsequent years.
The deduction for contributions to a traditional IRA is generally phased out for taxpayers covered by a workplace retirement plan whose incomes are above certain levels. For someone covered by a workplace plan during any part of 2016, the deduction is phased out if the taxpayer’s modified adjusted gross income (MAGI) for that year is between $61,000 and $71,000 for singles and heads of household and between $0 and $10,000 for those who are married filing separately. For married couples filing a joint return where the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range for the deduction is $98,000 to $118,000. Where the IRA contributor is not covered by a workplace retirement plan but is married to someone who is covered, the MAGI phase-out range is $184,000 to $194,000.
Even though contributions to Roth IRAs are not tax deductible, the maximum permitted amount of these contributions is phased out for taxpayers whose incomes are above certain levels. The MAGI phase-out range is $184,000 to $194,000 for married couples filing a joint return, $117,000 to $132,000 for singles and heads of household and $0 to $10,000 for married persons filing separately. For detailed information on contributing to either Roth or Traditional IRAs, including worksheets for determining contribution and deduction amounts, see Publication 590-A, available on IRS.gov.
Taxpayers whose employer does not offer a retirement plan may want to consider enrolling in myRA®, a retirement savings plan offered by the U.S. Department of the Treasury. It’s safe, affordable and a great option for people who don’t have a retirement savings plan at work. Taxpayers can direct deposit their entire refund or a portion of it into an existing myRA – Retirement Account. For further details and to open a myRA account online, visit www.myRA.gov.
Also known as the Retirement Savings Contributions Credit, the Saver’s Credit is often available to IRA contributors whose adjusted gross income falls below certain levels. For 2016, the income limit is $30,750 for singles and married filing separate, $46,125 for heads of household and $61,500 for married couples filing jointly.
Eligible taxpayers get the credit even if they qualify for other retirement-related tax benefits. Like other tax credits, the Saver’s Credit can increase a taxpayer’s refund or reduce the taxes they owe. The amount of the credit is based on a number of factors, including the amount contributed to either a Roth or Traditional IRA and other qualifying retirement programs. Form 8880 is used to claim the Saver’s Credit, and its instructions have details on figuring the credit correctly.