Calendar year 2016 is long gone, but there’s still time to make a regular IRA contribution for tax year 2016! You have until your tax return due date (not including extensions) to contribute up to $5,500 for 2016 ($6,500 if you turned age 50 by December 31, 2016). For most taxpayers, the contribution deadline for tax year 2016 is April 18, 2017.
You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit (or, if less, 100 percent of your earned income). You may also be able to contribute to an IRA on behalf of your spouse for 2016, even if your spouse didn’t have any income in 2016.
You can contribute to a traditional IRA for 2016 if you had taxable compensation during the calendar year and if you did not turn age 70½ before December 31, 2016. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2016, then your ability to deduct your contributions may be limited, or even eliminated entirely, depending on your filing status and your modified adjusted gross income (MAGI) (see table below). That being said, even if you cannot deduct your traditional IRA contribution, you can still make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you’re eligible to do so, you’ll be better off contributing to a Roth IRA than making nondeductible contributions to a Traditional IRA.
Both traditional IRAs and Roth IRAs provide attractive tax breaks, but the timing of when you get to claim those tax breaks differs. Traditional IRA contributions are tax deductible on federal tax returns and many state tax returns for the year in which you make the contribution. And withdrawals in retirement are taxed at your ordinary income tax rate. By contrast, Roth IRAs provide no tax break when you make your contributions, but your earnings and withdrawals are generally tax-free. In a nutshell, with traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take it out in retirement.
You can contribute to a Roth IRA if your MAGI is within certain dollar limits (even if you’re 70½ or older). For 2016, if you file your federal tax return as a single person or head of household, you can make a full Roth contribution if your MAGI is $117,000 or less. Your maximum contribution is phased out in stages if your MAGI is between $117,000 and $132,000, and you can’t contribute at all if your MAGI is greater than $132,000. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your MAGI is $184,000 or less. Your contribution is phased out in stages if your MAGI is between $184,000 and $194,000, and you can’t contribute at all if your income is over $194,000. And if you’re married but filing separately, your contribution begins to phase out with any income over $0, and you can’t contribute at all if your income is over $10,000.
Even if your income is too high to make an annual contribution to a Roth IRA, there’s an easy workaround. If you haven’t yet reached age 70½, you can simply make a nondeductible contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs that you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. This is sometimes called a “Back-Door” Roth IRA as we explained in a recent post. That post will also show you how a couple used a backdoor IRA to their advantage.
Keep in mind that if you make any size contribution to a Roth IRA for 2016 prior to your tax return due date, and if this is your first Roth IRA contribution, then your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2016.
Contact us anytime (610.695.8070) if you or someone close to you needs help sorting through these complex IRA issues.