What You Need to Know Before You Make Your Next IRA Contribution

uf-c4u1usfq-tim-evansHow much you may contribute to your IRA remains largely unchanged for 2017. However, the income limits that apply to IRAs have changed.

Read on for a summary of what you need to know before you make your next IRA contribution.

IRAs and Roth IRA Contribution Limits. As in 2016, the amount of money you can add to your 2017 IRA or Roth IRA remains unchanged at $5,500 per person per year. If you were age 50 or older last year, you can contribute an extra $1,000 to your IRA. Ditto for 2017.

Contributions to your IRA and Roth IRA may be made for the previous tax year up until your tax filing date, not counting extensions.

In English: you can add money to your 2016 IRA at any time on or before the date when you actually file your tax return. However, if you take an extension to file your taxes late, your IRA contribution is still due no later than April 15th  (or the date when you actually file your return, whichever is earlier).

Note: While the contribution limits remain unchanged, the income phase-outs that affect Roth IRAs and traditional IRAs have changed.

IRA and Roth IRA Income Phase-outs

Roth IRA: Income phase-outs begin for married taxpayers with 2016 Modified Adjusted Gross Incomes (MAGI) between $186,000 – $194,000. Married people who file a joint tax return and have MAGI for 2016 of less than $186,000, can contribute the maximum amount to a Roth IRA.

Married people with a 2016 MAGI greater than $194,000 may NOT contribute to a Roth IRA.

If your MAGI falls in between those numbers, you may do a partial contribution based on your income.

The calculation for Modified Adjusted Gross Income (MAGI) can be complicated. It starts with your Adjusted Gross Income (found on line 37 on your 1040) and adds back other items such as IRA deductions, self-employment tax, student loan deductions, etc. The calculation is explained in painful detail at the IRS.gov website.

Traditional IRA: Anyone may contribute to a traditional IRA regardless of their income if they have earned income from their job or business. The question is whether or not the contribution is tax deductible. The answer can be complicated since it depends on your income and whether or not you or your spouse participated in a retirement plan at work.

In general, if you are covered by a retirement plan at work, a married person who files a joint tax return with their spouse they may deduct their IRA contribution if their modified adjusted gross income is $98,000 or less. If they make between $98,001 and $118,000 they may take a partial tax deduction. If their adjusted gross income is greater than $118,000, they may not deduct any portion of their IRA contribution.

If you are NOT covered by a retirement plan at work, but your spouse is then the income phase-outs are different.

If your MAGI is less than $184,000 and you are not covered by a retirement plan but your spouse is, then your 2016 IRA contribution will be tax deductible. However, if your income is between $184,000 and $194,000, you only qualify for a partial deduction. Married couples filing jointly with incomes greater than $194,000 and who also have a retirement plan at work may not deduct any portion of their IRA contribution from their 2016 taxable income.

For specific details regarding the tax deductibility of your 2016 IRA contribution, I suggest you go straight to the source. Check out www.IRS.gov or click here.

The income phase-outs for 2017 have changed. In the 2017 tax year income phase-outs are bumped up $1,000. For the precise numbers, check out this page on the IRS website.

Determining what type of IRA you qualify for and which type makes the most sense for you can be confusing. Ask your tax preparer or financial advisor for their advice on whether you can contribute to a Roth IRA, whether or not you qualify to make tax-deductible contributions to a traditional IRA, and which type of IRA may be best for you.

For more information regarding the rules of IRAs, download IRS Publication 590-A.

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