IRA Regular Contributions: Eligibility, Contribution Limits, and Deductibility | Wolters Kluwer
  • Insights

  • IRA Regular Contributions: Eligibility, Contribution Limits, and Deductibility

    Mike Schiller Onward

    by Mike Schiller, Consultant, Tax Advantaged Accounts, Wolters Kluwer

    Published March 09, 2018



    Overview

    As taxpayers focus their attention on preparing their 2017 tax return, many will assess whether to contribute to an individual retirement account (IRA) for 2017. This article will review the deadline for making traditional and Roth IRA regular contributions, regular contribution eligibility, the 2017 and 2018 regular contribution limits, and traditional IRA regular contribution deductibility.

    Traditional and Roth IRA Regular Contribution Eligibility

    The following chart shows the regular contribution eligibility requirements applicable to traditional and Roth IRAs.

    Eligibility
    Traditional IRA
    Roth IRA
    Compensation
    Compensation
    Younger than age 70½
    Income Limits

    Compensation Requirement

    For IRA regular contribution eligibility purposes compensation includes wages, salaries, tips, bonuses, commissions, self-employment net profit, taxable alimony and separate maintenance (see “Note” below), nontaxable combat pay, and a spouse’s compensation. It does not include passive income such as interest, dividends, earnings from property, IRA income, pension income, or social security income.

    Example

    Ronald, age 68 and single in 2017, had income from his pension, social security, gains from the sale of stock, and interest on some Certificates of Deposit. Because none of his income qualifies as compensation, Ronald cannot contribute to a traditional or Roth IRA for tax year 2017. Assuming no changes in compensation, Ronald cannot make regular contributions for future tax years either.

    Note: Under the Tax Cuts and Jobs Act of 2017, alimony received through a divorce or separation instrument executed after December 31, 2018, will not be taxable to the recipient, and therefore will not be considered compensation for purposes of making an IRA regular contribution.

    Traditional IRA—Younger than Age 70½ Requirement

    An individual may not make a traditional IRA regular contribution for the year he or she attains age 70½ or any subsequent year.

    Example

    Joe, born April 10, 1947, attained age 70½ in 2017. Even though Joe had compensation in 2017, he cannot make a traditional IRA regular contribution for 2017 or subsequent tax years.

    Example

    Josie, born July 3, 1947, attains age 70½ in 2018. Assuming Josie had compensation in 2017, she can make a traditional IRA regular contribution for 2017 by her tax-filing deadline of April 17, 2018. However, she cannot make a traditional IRA regular contribution for 2018 or subsequent years.

    Roth IRA—Modified Adjusted Gross Income (MAGI) Requirement

    Although there is no age restriction to make a Roth IRA regular contribution, an individual whose MAGI is too high will be restricted from making a Roth IRA regular contribution. An individual’s MAGI will determine whether he/she is eligible to make a full contribution, a partial contribution, or no contribution to his/her Roth IRA.

    Although the contribution limits did not increase from 2017 to 2018, cost-of-living adjustments (COLAs) did increase the modified adjusted gross income (MAGI) limits that determine Roth IRA eligibility.

    Roth IRA Eligibility MAGI Thresholds
    Filing Status
    Tax Year
    Full Contribution
    Partial Contribution
    No Contribution
    Single
    2017
    ≤ $118,000
    Between $118,000 and $133,000
    ≥ $133,000
    2018
    ≤ $120,000
    Between $120,000 and $135,000
    ≥ $135,000
    Married, Joint
    2017
    ≤ $186,000
    Between $186,000 and $196,000
    ≥ $196,000
    2018
    ≤ $189,000
    Between $189,000 and $199,000
    ≥ $199,000
    Married, Separate
    2017
    N/A
    < $10,000
    ≥ $10,000
    2018
    N/A
    < $10,000
    ≥ $10,000


    Example

    Jane, age 42 and single, had compensation and MAGI of $51,000 in 2017. Because her income was less than $118,000, Jane may make a full Roth IRA regular contribution for 2017 by April 17, 2018. Assuming Jane’s MAGI remains below $120,000 for 2018, she can also make a full Roth IRA regular contribution for 2018.

    Example

    Alex and Sherry, ages 52 and 48 respectively, are married, had compensation and MAGI of $128,000 in 2017, and will file a joint federal income tax return for 2017. Because their 2017 joint MAGI is less than $186,000, both Alex and Sherry can make a full Roth IRA regular contribution for 2017 by April 17, 2018. Assuming their MAGI remains below $189,000 for 2018, they both can also make a full Roth IRA regular contribution for 2018. 

    Traditional and Roth IRA Regular Contribution Limits

    The following chart shows the 2017 and 2018 traditional and Roth IRA regular contribution limits.

    Tax Year
    Standard Limit
    Younger Than Age 50
    Catch-Up Contribution
    Age 50 or Older
    Contribution Limit
    Age 50 or Older
    2017
    $5,500
    $1,000
    $6,500
    2018
    $5,500
    $1,000
    $6,500


    An individual may choose to deposit an amount up to his/her regular contribution limit to either a traditional IRA or a Roth IRA, or he/she may split the regular contribution limit amount between a traditional and Roth IRA. If making a regular contribution to both a traditional and a Roth IRA, the total amount contributed cannot exceed the contribution limit.

    Example Continued

    Jane, from an earlier example is age 42, single, and had compensation and MAGI of $51,000 in 2017. Jane’s 2017 traditional and Roth IRA aggregate contribution limit is $5,500. Assuming Jane has compensation for 2018, her aggregate traditional and Roth IRA contribution limit is again $5,500.

    Example Continued

    Alex and Sherry, from an earlier example are ages 52 and 48 respectively, are married, had compensation and MAGI of $128,000 in 2017 and will file a joint federal income tax return for 2017. Alex’s 2017 traditional and Roth IRA aggregate contribution limit is $6,500 and Sherry’s 2017 traditional and Roth IRA aggregate contribution limit is $5,500. Assuming Alex and Sherry have the same compensation and MAGI for 2018, Alex’s aggregate traditional and Roth IRA contribution limit is again $6,500 and Sherry’s aggregate traditional and Roth IRA contribution limit is $5,500.

    Traditional IRA Deductibility Thresholds

    An individual is eligible to make a traditional IRA regular contribution if he/she has compensation and is younger than 70½ the entire year for which the contribution is made. However, a regular contribution made to a traditional IRA may or may not be deductible. IRA owners who are active participants in certain employer plans are subject to MAGI limitations when determining whether a traditional IRA regular contribution is deductible. Although the contribution limits did not increase from 2017 to 2018, COLAs increased the deductibility thresholds for individuals that are active participants in certain employer plans.

    Traditional IRA Deductibility MAGI Thresholds
    Filing Status
    Tax Year
    Full Deduction
    Partial Deduction
    No Deduction
    Single
    2017
    ≤ $62,000
    Between $62,000 and $72,000
    ≥ $72,000
    2018
    ≤ 63,000
    Between $63,000 and $73,000
    ≥ $73,000
    Married, Joint
    2017
    ≤ $99,000
    Between $99,000 and $119,000
    ≥ $119,000
    2018
    ≤ $101,000
    Between $101,000 and $121,000
    ≥ $121,000
    Married, Joint (not active participant but spouse is)
    2017
    ≤ $186,000
    Between $186,000 and $196,000
    ≥ $196,000
    2018
    ≤ $189,000
    Between $189,000 and $199,000
    ≥ $199,000
    Married, Separate
    2017
    N/A
    < $10,000
    ≥ $10,000
    2018
    N/A
    < $10,000
    ≥ $10,000


    Example

    Continuing with an earlier example, Jane is age 42, single, had compensation and MAGI of $51,000 for 2017, and was an active participant in her employer’s 401(k) plan. Jane meets the eligibility requirements to make a traditional IRA regular contribution, and because her 2017 MAGI was less than $62,000, she is eligible to fully deduct a traditional IRA regular contribution for 2017. Jane is also eligible to make a Roth IRA contribution. So, preferably with the guidance of a tax professional, Jane may choose to make either a deductible traditional IRA contribution, a Roth IRA contribution which is not deductible, or may split her contribution between the two. Only the portion she contributes to the traditional IRA is eligible to be deducted.

    Example

    Continuing with an earlier example, Alex and Sherry, ages 52 and 48 respectively, are married and had compensation and MAGI of $128,000 in 2017. During 2017, Alex participated in an employer-sponsored retirement plan and Sherry did not. Since their 2017 MAGI was more than $119,000 any traditional IRA regular contribution made by Alex will not be deductible. However, Sherry was married to an active participant but was not an active participant herself, and any traditional IRA contribution she makes is eligible to be deducted since their MAGI was below $186,000. So, with the guidance of a tax professional, Alex may decide to contribute to a Roth IRA for 2017. Sherry may choose to either make a traditional IRA deductible contribution, forego the deduction and make a Roth IRA contribution for 2017, or make regular contributions to both the traditional and Roth IRAs but not in excess of $5,500 between the two.

    IRA Contribution Deadline

    The regular contribution deadline is an individual’s tax-filing deadline, excluding extensions (generally, April 15 following the year for which the contribution is made). However, because April 15, 2017 falls on a Sunday, and in 2018 Emancipation Day, a designated holiday in Washington D.C., is recognized on Monday, April 16, the 2017 tax-filing deadline is Tuesday, April 17, 2018. The deadline for an individual to make a 2017 tax-year contribution to an IRA is also April 17, 2018.

    When accepting regular contributions between January 1 and an individual’s tax-filing deadline, it’s always important to ask which tax year (i.e., previous or current) the regular contribution is intended for, and to document it properly.

    Making Contributions for Both 2017 and 2018

    Occasionally, IRA owners make contributions for both the previous and current year at the same time. This generally can only occur between January 1 and April 15 (April 17, 2018 for 2017 contributions).

    Example

    Jane from an earlier example, is age 42, single, and had compensation and MAGI of $51,000 for 2017. Jane has decided to contribute to a traditional IRA. On March 12, 2018, Jane decided to make both her 2017 and 2018 contributions, and subsequently wrote a check to ABC Bank for $11,000. ABC Bank documents a $5,500 contribution for 2017 to her traditional IRA, and separately documents a $5,500 contribution for 2018 to the same traditional IRA. Jane will deduct her 2017 $5,500 traditional IRA regular contribution on her 2017 federal income tax return. Assuming Jane’s MAGI is below $63,000 in 2018, she will again qualify to deduct her entire 2018 traditional IRA regular contribution on her 2018 federal income tax return.

    Conclusion

    An IRA owner, not an IRA custodian/trustee, is responsible for determining his/her regular IRA contribution eligibility, whether he/she can deduct all or a portion of a traditional IRA regular contribution, or the amount of the Roth IRA regular contribution he/she is eligible to contribute. Although an IRA custodian/trustee can assist individuals by educating them on IRA rules, IRA owners should make their IRA decisions with the guidance of his/her tax or legal professional.

    For an opportunity to learn more about IRAs and other tax advantaged accounts, including Health Savings Accounts and Coverdell Education Savings Accounts, consider joining us for one of our IRA, HSA, or CESA Live Streaming events offered on a variety of topics. For more information call us at 1-800-552-9408.



  • Please take a moment and tell us what you think of our content.