Quick Tax Tips For The Tax Season (Tip #17)

12:00 AM Jamaal Solomon 0 Comments Category :

Saving for Retirement!

I have a 6-year old son and a 3-year old daughter. The last thing on my mind is retirement unless I win the lottery than I'm retiring early. If you are like me with horrible lottery luck then it is time to start saving now for retirement. It is never too late or too early to start to put aside money for your retirement. There are several ways that our government tries to encourage saving. One way is offering tax deductions for IRA contributions. Today's post will be about the basics of claiming a tax deduction for your IRA contribution. As with all of my quick tax tip posts, this information comes straight from the IRS website and I have included the link.

IRA Contribution Limits

For 2015, 2016, and 2017, your total contributions to all of your traditional and Roth IRAs cannot be more than:

  • $5,500 ($6,500 if you’re age 50 or older), or
  • your taxable compensation for the year, if your compensation was less than this dollar limit.

The IRA contribution limit does not apply to:
  • Rollover contributions
  • Qualified reservist repayments

Claiming a tax deduction for your IRA contribution

Your traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.

IRA deduction limits

Roth IRA contribution limit
The same general contribution limit applies to both Roth and traditional IRAs. However, your Roth IRA contribution might be limited based on your filing status and income.

IRA contributions after age 70½
You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.

Spousal IRAs
If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. 

If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.

Can I contribute to an IRA if I participate in a retirement plan at work?
You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. 

Tax on excess IRA contributions

An excess IRA contribution occurs if you:
  • Contribute more than the contribution limit.
  • Make a regular IRA contribution to a traditional IRA at age 70½ or older.
  • Make an improper rollover contribution to an IRA.

Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.

To avoid the excess contributions tax:
  • withdraw the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
  • withdraw any income earned on the excess contribution.