Tag Archive for Retirement

IRS Offers IRA Tax Tips for the 2016 Tax Year

IRS Offers IRA Tax Tips for the 2016 Tax Year

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.

The IRS offers the following tax tips on IRAs:

  • Age Rules. Taxpayers must be under age 70½ 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 Jan. 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. See IRS Publication 590-A.
  • 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% 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. Taxpayer’s may also direct deposit their entire refund or a portion of it into an existing myRA.

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Learn more about how to verify your identity and electronically sign your tax return at Validating Your Electronically Filed Tax Return.

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Top Tips on Making IRA Contributions

IRS Tax Tip 2014-50

f4da9-piggybudgetIf you made IRA contributions or you’re thinking of making them, you may have questions about IRAs and your taxes. Here are some important tips from the IRS about saving for retirement using an IRA.

 

1. You must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.

2. You 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 you’re married and file a joint return, generally only one spouse needs to have compensation.

3. You can contribute to an IRA at any time during the year. To count for 2013, you must make all contributions by the due date of your tax return. This does not include extensions. That means you usually must contribute by April 15, 2014. If you contribute between Jan. 1 and April 15, make sure your plan sponsor applies it to the right year.

4. In general, the most you can contribute to your IRA for 2013 is the smaller of either your taxable compensation for the year or $5,500. If you were age 50 or older at the end of 2013, the maximum you can contribute increases to $6,500.

5. You normally won’t pay income tax on funds in your traditional IRA until you start taking distributions from it. Qualified distributions from a Roth IRA are tax-free.

6. You may be able to deduct some or all of your contributions to your traditional IRA. Use the worksheets in the Form 1040A or Form 1040instructions to figure the amount that you can deduct. You may claim the deduction on either form. Unlike a traditional IRA, you can’t deduct contributions to a Roth IRA.

7. If you contribute to an IRA you may also qualify for the Saver’s Credit. The credit can reduce your taxes up to $2,000 if you file a joint return. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. You can file Form 1040A or 1040 to claim the Saver’s Credit.

8. See Publication 590, Individual Retirement Arrangements, for more about IRAs.

Always consult your tax professional for your individual situation.

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