If you haven’t already funded your retirement account for 2016, consider doing so by April 18, 2017. That’s the deadline for contributions to a traditional IRA (deductible or not) and a Roth IRA. However, if you have a SEP and get a filing extension to October 16, 2017, you can wait until then to deposit 2016 contributions. Making a deductible contribution will help you lower your tax bill for 2016 and your contributions will compound tax-deferred.
To qualify for the full annual IRA deduction in 2016, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, you must have adjusted gross income of $61,000 or less for singles, or $98,000 or less for married couples filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $183,000. For 2016, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs for 2016 is $53,000.
Although choosing to contribute to a Roth IRA instead of a traditional IRA will not reduce your 2016 tax bill (Roth contributions are not deductible), it could be the better choice because all withdrawals from a Roth can be tax-free in retirement. Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $5,500 ($6,500 if you are age 50 or older by the end of 2016) to a Roth IRA, you must earn $117,000 or less a year if you are single or $184,000 if you’re married and file a joint return.
The amount you save from making a contribution will vary. If you are in the 25% tax bracket and make a deductible IRA contribution of $5,500, you will save $1,375 in taxes the first year. Over time, future contributions could save you thousands, depending on your contribution, income tax bracket and the number of years you keep the money invested. If you have any questions on retirement contributions, please call us.
Information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Withdrawals from a Roth IRA may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
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