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.
Additional IRS Resources:
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