Did you contribute to an Individual Retirement Arrangement last year? Are you thinking about contributing to your IRA now? If so, you may have questions about IRAs and your taxes.
Here are some IRS tax tips about saving for retirement using an IRA:
- Age Rules. You must be under age 70½ at the end of the tax year in order to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.
- Compensation Rules. You 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 you are married and file a joint tax return, only one spouse needs to have compensation in most cases.
- When to Contribute. You can contribute to an IRA at any time during the year. To count for 2015, you must contribute by the due date of your tax return. This does not include extensions. This means most people must contribute by April 18, 2016. If you contribute between Jan. 1 and April 18, make sure your plan sponsor applies it to the year you choose (2015 or 2016).
- Contribution Limits. In general, the most you can contribute to your IRA for 2015 is the smaller of either your taxable compensation for the year or $5,500. If you were age 50 or older at the end of 2015, the maximum you can contribute increases to $6,500. If you contribute more than these limits, an additional tax will apply. The additional tax is six percent of the excess amount contributed that is in your account at the end of the year.
- Taxability Rules. You normally don’t pay income tax on funds in your traditional IRA until you start taking distributions from it. Qualified distributions from a Roth IRA are tax-free.
- Deductibility Rules. You may be able to deduct some or all of your contributions to your traditional IRA. See IRS Publication 590-A for more.
- Saver’s Credit. If you contribute to an IRA you may also qualify for the Saver’s Credit. It can reduce your taxes up to $2,000 if you file a joint return. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. You can file Form 1040A or 1040 to claim the Saver’s Credit.
- New myRA. If your employer does not offer a retirement plan, you may want to consider myRA. It is a new retirement savings plan offered by the U.S. Department of the Treasury. It's safe and affordable. You can also direct deposit your entire refund or a portion of it into an existing myRA – Retirement Account.