We’re only about half-way into tax season and I seem to be getting the same question over and over again – “How much can I contribute to my IRA this year?” The answer seems like it should be simple, but it’s not. The tax code makes the answer quite complex, actually. So I thought it would make sense to delve into this topic since the 4/15 filing deadline is rapidly approaching.
Yearly Contribution Limits
In general, you can contribute up to a total of $5,500 to your IRAs in a given tax year. If you are 50 or above, the you can contribute up to $6,500. These amounts can be split up however you would like between a Traditional and Roth IRA. Once you reach 70 ½ year old however, you cannot make regular contributions to a Traditional IRA but you can still contribute to a Roth IRA.
Income Limitations on Contributions
The first limitation is on your earned income. If your wages or self-employment income is less than the contribution amounts listed above, your deduction is limited to your earnings. If you file a Joint return, the limitation is based on your combined earned income.
Even though there is no current deduction allowed for a Roth IRA, you still need to pass the AGI limitations below. The AGI limit amounts are based on 2016 limits and are listed as Single/Joint filers.
- Maximum contribution if your AGI is $117,000/$184,000 or less
- No contribution if your AGI is $132,000/$194,000 or more
- Anything in between these ranges, the contribution amount is reduced.
For Traditional IRAs, the test are much more stringent to deduct a contribution. Again, the AGI limits are listed as Single/Joint filers below and are based on 2016 AGI limits.
- You have a retirement plan at work
- You can take a full deduction if your AGI is $61,000/$98,000 or less
- If your AGI is over $71,000/$118,000, no deduction is allowed.
- Anything in between these ranges allows for a partial deduction.
- You do not have a retirement plan at work and neither does your spouse, a full deduction is allowed.
- You do not have a retirement plan at work but your spouse does
- You can take a full deduction if your AGI is under $184,000
- If your AGI is over $194,000 no deduction is allowed
- Anything in between these ranges allows for a partial deduction.
Tax on Excess IRA Contributions
If you contribute more than the maximum limit based on the calculations above, make a contribution to a Traditional IRA after age 70 1/2, or make an improper rollover contribution to an IRA, the IRS will assess a tax on the excess contributions. The tax is 6% per year as long as the contributions stay in the IRA. If you realize you didn’t make the correct contribution amount, withdraw the amounts before you file your taxes. Additionally, withdraw any income earned on the excess contributions.
Non-Deductible Contributions
Even if you can’t deduct your IRA contribution, all is not lost! Make sure you file Form 8606 with your taxes. The amount you can’t deduct will add to your basis against future withdrawals, which leads to less tax in the future.
I hope this article helped bring you some clarity on a complex topic. If you have an IRA make sure you plan out how much you will be contributing every year with your tax preparer. Should you have any questions please feel free to contact me!
