by Mike Schiller, Consultant, Tax Advantaged Accounts, Wolters Kluwer
As taxpayers focus their attention on preparing their 2016 tax return, many will assess whether to contribute to an individual retirement account (IRA) for 2016. This article will review the deadline for making traditional and Roth IRA regular contributions, regular contribution eligibility, the 2016 and 2017 regular contribution limits, and traditional IRA regular contribution deductibility.
The following chart shows the regular contribution eligibility requirements applicable to traditional and Roth IRAs.
For IRA regular contribution eligibility purposes compensation includes income from wages, salaries, tips, bonuses, commissions, self-employment net profit, and a spouse’s income. It does not include passive income such as interest, dividends, earnings from property, IRA income, pension income, or social security income.
Ronald, age 68 and single in 2016, had income from his pension, social security, gains from the sale of stock, and interest on some certificate of deposits. Because none of his income qualifies as compensation, Ronald cannot contribute to a traditional or Roth IRA for tax year 2016. Assuming no changes in compensation, Ronald cannot make regular contributions for future tax years either.
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.
Joe, born April 10, 1946, attained age 70½ in 2016. Even though Joe had compensation in 2016, he cannot make a traditional IRA regular contribution for 2016 or subsequent tax years.
Josie, born July 3, 1946, attains age 70½ in 2017. Assuming Josie had compensation, she can make a traditional IRA regular contribution for 2016 by her tax filing deadline of April 18, 2017. However, she cannot make a traditional IRA regular contribution for 2017 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 2016 to 2017, cost-of-living adjustments (COLAs) did increase the modified adjusted gross income (MAGI) limits that determine Roth IRA eligibility.
Jane, age 42 and single, had compensation and MAGI of $51,000 in 2016. Because her income was less than $117,000, Jane may make a full Roth IRA regular contribution for 2016 by April 18, 2017. Assuming Jane’s MAGI remains below $118,000 for 2017, she can also make a full Roth IRA regular contribution for 2017.
Alex and Sherry, ages 52 and 48 respectively, are married, had compensation and MAGI of $128,000 in 2016, and will file a joint federal income tax return for 2016. Because their 2016 joint MAGI is less than $184,000, both Alex and Sherry can make a full Roth IRA regular contribution for 2016 by April 18, 2017. Assuming their MAGI remains below $186,000 for 2017, they both can also make a full Roth IRA regular contribution for 2017.
The following chart shows the 2016 and 2017 traditional and Roth IRA regular contribution limits.
An individual may choose to deposit an amount up to his/her contribution limit to either a traditional IRA or a Roth IRA, or he/she may split the contribution 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.
Jane, from an earlier example is age 42, single, and had compensation and MAGI of $51,000 in 2016. Jane’s 2016 traditional and Roth IRA aggregate contribution limit is $5,500. Assuming Jane has compensation for 2017, her aggregate traditional and Roth IRA contribution limit is again $5,500.
Alex and Sherry, from an earlier example are ages 52 and 48 respectively, are married, had compensation and MAGI of $128,000 in 2016 and will file a joint federal income tax return for 2016. Alex’s 2016 traditional and Roth IRA aggregate contribution limit is $6,500 and Sherry’s 2016 traditional and Roth IRA aggregate contribution limit is $5,500. Assuming Alex and Sherry have compensation for 2017, 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.
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 qualified employer plans must meet MAGI thresholds in order to deduct a traditional IRA regular contribution. Although the contribution limits did not increase from 2016 to 2017, COLAs increased the deductibility thresholds for individuals that are active participants in certain qualified employer plans.
Continuing with an earlier example, Jane is age 42, single, had compensation and MAGI of $51,000 for 2016, 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 2016 MAGI was less than $61,000, she is eligible to fully deduct a traditional IRA regular contribution for 2016. 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.
Continuing with an earlier example, Alex and Sherry, ages 52 and 48 respectively, are married and had compensation and MAGI of $128,000 in 2016. During 2016, Alex participated in an employer-sponsored retirement plan and Sherry did not. Since their 2016 MAGI was more than $118,000 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 $184,000. So, preferably with the guidance of a tax professional, Alex may decide to contribute to a Roth IRA for 2016. Sherry may choose to either make a traditional IRA deductible contribution or forego the deduction and make a Roth IRA contribution for 2016.
The regular contribution deadline is an individual’s tax filing due date, excluding extensions (generally, April 15 following the year for which the contribution is made). However, because April 15, 2017 falls on a Saturday, and in 2017 Emancipation Day, a designated holiday in Washington D.C., will be recognized on Monday, April 17, the 2016 tax-filing due is Tuesday, April 18, 2017. The deadline for an individual to contribute to an IRA, HSA, or CESA is the same date.
When accepting regular contributions between January 1 and an individual’s tax-filing due date, 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.
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 18, 2017 for 2016 contributions).
Jane from an earlier example, is age 42, single, and had compensation and MAGI of 51,000 for 2016. Jane has decided to contribute to a traditional IRA. On March 12, 2017, Jane decided to make both her 2016 and 2017 contributions, and subsequently wrote a check to ABC Bank for $11,000. ABC Bank documents a $5,500 contribution for 2016 to her traditional IRA, and documents a $5,500 contribution for 2017 to the same traditional IRA. Jane will deduct her 2016 $5,500 traditional IRA regular contribution on her 2016 federal income tax return. Assuming Jane’s MAGI is below $62,000 in 2017, she will again qualify to deduct her entire 2017 traditional IRA regular contribution on her 2017 federal income tax return.
An IRA owner, not an IRA custodian/trustee, is responsible for determining his/her regular IRA contribution eligibility and whether he/she can deduct all or a portion of a traditional IRA regular contribution. 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.
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