Tax-advantaged retirement plans like individual retirement accounts (IRA) allow your money to grow tax-deferred, or, in the case of Roth accounts, tax-free. The deadline for 2017 contributions is April 17, 2018. Deductible contributions will lower your 2017 tax bill, but even non-deductible contributions can be beneficial.
Do not lose the opportunity
The 2017 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2017), but any unused limit cannot be carried forward to make larger contributions in future years.
This means, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So, to get the most from your potential tax-deferred or tax-free savings, it is a good idea to use up as much of your annual limit as possible.
Three types of contributions
If you have not already maxed out your 2017 IRA contribution limit, consider making one of these types of contributions by April 17:
- Deductible traditional. With traditional IRAs, account growth is tax-deferred and distributions are subject to income tax. If you and your spouse do not participate in an employer-sponsored plan such as a 401(k), the contribution is fully deductible on your 2017 tax return. If you or your spouse does participate in an employer-sponsored plan, your deduction is subject to a modified adjusted gross income (MAGI) phaseout:
- For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
- For a spouse who participates: $99,000–$119,000
- For a spouse who does not participate: $186,000–$196,000
- For single and head-of-household taxpayers participating in an employer-sponsored plan: $62,000–$72,000
Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range cannot deduct any IRA contribution.
- Roth. With Roth IRAs, contributions are not deductible, but qualified distributions, including growth, are tax-free. Your ability to contribute, however, is subject to a MAGI-based phaseout:
- For married taxpayers filing jointly: $186,000–$196,000
- For single and head-of-household taxpayers: $118,000–$133,000
You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
- Non-deductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a non-deductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you will be taxed only on the growth.
Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.
Maximize your tax-advantaged savings
Traditional and Roth IRAs provide a powerful way to save for retirement on a tax-advantaged basis. Contact us to learn more about making 2017 contributions and making the most of IRAs in 2018 and beyond.