Contributing Blogger: Helayne Levy, J.D., LL.M. in Elder Law Firm, The Elder Law Firm of Andrew Olsen
It’s tax time … again. Weird how it comes upon us so quickly, but I guess it’s true what they say; “ Time flies when you’re having fun!” So with fun and taxes in mind, let’s talk about funding your IRA correctly so we can avoid double taxation and excise tax when funding is not timed correctly! The contributions that we make to our IRA have eligibility requirements, along the lines of “the benefits of membership”. If the contributions fit the criteria of “membership” into the group of eligible contributions, they will go a long way towards helping to ensure you enjoy a financially secured retirement. “Membership” in the exclusive club of eligibility means the following:
- Eligible Compensation: in order to make a contribution to a Traditional IRA or a Roth IRA, you must have eligible compensation which includes W-2 wages, commissions, professional fees, bonuses and self-employment income. For purposes of making eligible contributions to an IRA, taxable alimony and separate maintenance payments received under a divorce decree are considered eligible compensation. If you are married and file jointly with your spouse, your spouse’s income can be used as eligible compensation if you do not receive eligible compensation of your own.
- Contribution Limits: there are contribution limits to the maximum amount that can be contributed to a Traditional IRA and to a Roth IRA, which is determined by whether you will be at least 50 years of age by the end of the year
- Eligibility:There are 2 eligibility requirements that apply, in addition to the eligible compensation requirement:
- Age Limitation: for contributions to a Roth IRA, there are no age limitations. However, contributions cannot be made to a Traditional IRA for the year that you turn age 70 ½ and for any year thereafter.
- Income Limitation: For contributions to a Traditional IRA, there is no income limitation but you are not eligible to make a contribution to a Roth IRA if your modified adjusted gross income (MAGI) exceeds certain amounts. Contact a tax professional for these amounts.
- .Contribution Deadline: Contributions must be made by your filing due date, April 15th if you file on a calendar year, and the contribution must be delivered to your IRA custodian by this deadline if hand-delivered or if the instructions are provided via fax.. If contributions are made by mail, it must be mailed by this deadline (note: if mailed, you must use an IRS approved mailing service in order to satisfy this postmark requirement). No extensions apply. If contributions do not meet this deadline requirement, the IRA custodian is required to report it for the year in which they receive the amount, even if you wanted it to be applied to the previous year.
- Deductions and The Saver’s Tax Credit: Contributions to a traditional IRA are deductible, if eligible. If you are not covered under an employer sponsored retirement plan, if you are not married to someone who is covered under an employer sponsored retirement plan, you may be able to deduct the contribution.. However, if you and/or your spouse are covered under an employer sponsored retirement plan, a deduction may still be available depending on your modified adjusted gross income. Consult with a tax professional. If eligible, you can receive a nonrefundable Saver’s Tax Credit of up to $1000 for contributions made to your IRA and other retirement savings account.
The Take Away: Start Early, Contribute Often, Have Fun!