Am I eligible to contribute to a Traditional IRA?
You are eligible to contribute to a Traditional IRA if you are under age 70½ and you (or your spouse if married, filing a joint tax return) have eligible compensation.
What is compensation for purposes of making contributions to an IRA?
For IRA purposes, eligible compensation generally is defined as what you earn from working and includes wages, salary, tips, commissions, bonuses, and self-employment income, but not investment or pension income. As a general rule, you must earn income from personal services rendered. Any amount shown in the Wages, tips, other compensation box on the Form W-2, Wage and Tax Statement, minus any amount shown in the Nonqualified plans box will be considered eligible compensation for Traditional IRA contributions. In addition, taxable alimony and separate maintenance payments received under a decree of divorce or separate maintenance are considered eligible compensation for funding a Traditional or Roth IRA.
Does investment income qualify as compensation for purposes of making contributions to an IRA?
No. As a general rule, investment income does not qualify as earned income for purposes of making contributions to a Traditional or Roth IRA.
If I’m self-employed, how do I determine if I have earned income for purposes of making a contribution to an IRA?
IRS Publication 590, Individual Retirement Arrangements (IRAs), provide some guidance, but it is always good to consult with a competent financial or tax advisor to determine the amount of your compensation. As a self-employed individual, you must have made a net profit in your business (also called net business income) to qualify as having eligible compensation for purposes of IRA contributions. Compensation generally is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of
- The deduction for contributions made on your behalf to retirement plans, and
- The deduction allowed for the deductible part of your self-employment taxes.
If you operate more than one nonincorporated business, you must look at your aggregate self-employment income to determine your amount of eligible compensation.
If I am covered by a retirement plan at work, am I eligible to make a contribution to a Traditional IRA?
Generally, yes. Anyone who is under age 70½ and has eligible compensation may make a Traditional IRA contribution. Active participation in a retirement plan does not affect your eligibility to make a contribution to a Traditional IRA, but it does affect your ability to deduct the contribution.
If neither you nor your spouse is an active participant in a retirement plan, you are eligible to deduct your full contribution. Otherwise, refer to the chart below to determine the amount of deduction you are allowed.
|Tax-Filing Status||Active Participant||Year||Full Deduction if MAGI is||Partial Deduction if MAGI is||No Deduction if MAGI is|
|Single||Yes||2016||$61,000 or less||$61,000–$71,000||$71,000 or more|
|2017||$62,000 or less||$62,000–$72,000||$72,000 or more|
|Married, filing jointly||Yes||2016||$98,000 or less||$98,000–$118,000||$118,000 or more|
|2017||$99,000 or less||$99,000–$119,000||$119,000 or more|
|Married, filing jointly||No, but spouse is||2016||$184,000 or less||$184,000–$194,000||$194,000 or more|
|2017||$186,000 or less||$186,000–$196,000||$196,000 or more|
*Modified adjusted gross income (MAGI) is your adjusted gross income before certain deductions or adjustments to income.
Is my employer required to inform me if I am considered an “active participant” in its retirement plan?
Yes. Your employer must indicate on your IRS Form W-2 if you are considered an active participant in an employer-sponsored retirement plan and, therefore, subject to potential restrictions on tax-deductible contributions to a Traditional IRA.
If I am eligible to participate in a retirement plan through work, but choose not to, am I still considered an “active participant” when determining the deductibility of my Traditional IRA contribution?
Generally, no. If no employer contributions or forfeitures are allocated to the plan on your behalf, and you elect not to defer your wages into the plan, you generally will not be considered an active participant in your company’s plan.
If I intend to make nondeductible contributions to a Traditional IRA, do I need to set up a separate IRA for my nondeductible contributions to keep them separate from my deductible Traditional IRA assets?
No. You do not need to set up a separate IRA to receive nondeductible contributions. You must, however, track and report your nondeductible Traditional IRA contributions using IRS Form 8606, Nondeductible IRAs.
May I make both deductible and nondeductible contributions to a Traditional IRA for the same tax year?
Yes. But your aggregate contributions cannot exceed the maximum contribution limit of $5,500 for 2017 ($5,500 for 2016), or if you qualify for catch-up contributions, $6,500 for 2017 ($6,500 for 2016).
What is the deadline to contribute to a Traditional or Roth IRA?
You can contribute to your IRA anytime during the current year for that particular tax year. In fact, you can make contributions up until the due date for filing your tax return for that tax year, not including extensions. For most people, that date is April 15. For example, you can make your 2016 tax year contribution anytime between January 1, 2016, and April 18, 2017. And you can make your 2017 tax year contribution any time between January 1, 2017, and April 15, 2018.
If I file my taxes on a noncalendar-year basis, what is my deadline for making a regular contribution to a Traditional or Roth IRA?
Under the federal laws governing IRA contributions, you have until the deadline for filing your tax return (not including extensions) to make a Traditional or Roth IRA contribution regardless of whether you file your taxes on a calendar-year basis like most individual taxpayers or on a noncalendar-year basis.
Can I make contributions to a Traditional IRA if I am over age 70½?
You may not make regular contributions to a Traditional IRA for the tax year in which you attain age 70½ or any subsequent year. Nonetheless, you are not restricted on transferring or rolling over money to a Traditional IRA from another Traditional IRA or other retirement plan, provided you do not transfer or roll over any amounts considered to be required minimum distributions (RMDs).
How do I make a contribution to my Traditional or Roth IRA?
Your IRA administrator likely will ask you to complete a an IRA contribution form that will capture the information necessary to properly process your IRA contribution. You should be sure to identify in writing the type of contribution you are making (e.g., regular or rollover contribution) and, if applicable, the tax year for which the contribution is being made.
If I have a certificate of deposit (CD) that is earning a good rate of return and does not mature for several years, may I contribute the CD to my IRA in lieu of cash for my IRA contribution?
No. The federal laws governing IRA contributions require that contributions to IRAs, other than rollovers or transfers, must be made in cash. For this purpose, cash means currency, check, or money order.
If I am going to make a deductible contribution to my Traditional IRA, can I file my tax return before I make the contribution?
The deadline for making your Traditional IRA contribution is the due date of your federal tax return (not including extensions), regardless of when you physically file your tax return. For example, if you are eligible for a tax refund, you could file your return early in the year with the intent of using your tax refund to fund all or part of your Traditional IRA contribution. You cannot, however, claim an IRA contribution on your tax return and then fail to contribute to your IRA on or before the contribution deadline.
What is a spousal IRA contribution?
Generally, an individual must have eligible compensation in addition to being under age 70½ to be eligible to contribute to an IRA. Married couples who file a joint federal tax return and who have one spouse who does not have eligible compensation, may make a contribution for the non-earning spouse based on the compensation of the other spouse if they file a joint income tax return. Such IRA contributions are referred to as spousal IRA contributions.
What is the maximum spousal IRA contribution amount?
Spousal contributions are limited to the same dollar amount as regular IRA contributions, which is $5,500 for 2016 and for 2017, plus $1,000 catch-up contribution if eligible. Keep in mind that there must be enough eligible compensation between spouses to support the IRA contributions made for each spouse.
If I’m self-employed, but did not realize any income from my business this year. Am I potentially eligible for a spousal IRA contribution based on my spouse’s earned income?
Yes. If your spouse has earned income, you and your spouse file a joint federal tax return, and you are under age 70½, you generally may be eligible for a spousal contribution to your IRA.
If my spouse and I want to make an IRA contribution for both of us based on my earned income, must we establish two separate IRAs?
Yes. Even though you are taking advantage of the spousal IRA contribution rules, you must set up one IRA for each of you. You and your spouse must contribute to your own, separate IRAs.
If I am over age 70½ and am still working, may I make a contribution to my non-earning spouse’s IRA based on my earned income?
Yes. A compensated spouse need not be under age 70½ to make a spousal contribution for a noncompensated spouse. Your noncompensated spouse must be under age 70½, however, to be eligible to receive a spousal IRA contribution.
Is there any way to undo a regular contribution to a Traditional or Roth IRA?
Yes. You have until your federal tax return due date (including extensions) to remove any current-year contribution by following the same rules as removing excess contributions. To do so, you must remove the earnings attributable to that amount, which must be added to your taxable income. After your tax return due date (including extensions), you may only remove true excess contributions under these rules. These rules can be confusing, so work with a competent tax advisor to make sure you are handling the transaction properly.
If I change my mind, can I treat an IRA contribution that I made this year as a contribution for next year?
Federal laws governing IRA contributions allow you to carry forward an IRA contribution into a subsequent tax year only when your contribution exceeds your maximum contribution limit for the year (regardless of whether the contribution is deductible or nondeductible). You will be subject to a six percent excess contribution penalty tax on the amount that you carry forward.
What is the contribution tax credit? How does it work?
Commonly referred to as the “saver’s credit,” the tax credit reduces the federal income tax you owe dollar-for-dollar and is over and above any deduction or exclusion you may be entitled to for your retirement contributions. Qualifying individuals receive a credit (not to exceed $1,000) for the first $2,000 they contribute to IRAs and to retirement plans as salary deferrals. The tax credit is determined as a percentage (determined according to income—see charts below) of the aggregate contribution made by the individual. To qualify, a taxpayer must be at least age 18, not a full-time student, and not be claimed as a dependent on another person’s income tax return.
EXAMPLE: Let’s say you qualify for the maximum 50% credit and you contribute $2,500 in 2017 to an eligible retirement plan or IRA. You will reduce your tax bill by $1,000 in 2017 (50% of the first $2,000).
|Saver’s Tax Credit for 2016|
|Joint Return||Head Of Household||All Other Cases*|
|50%||Up to $37,000||Up to $27,750||Up to $18,500|
|0%||Over $61,500||Over $46,125||Over $30,750|
|Saver’s Tax Credit for 2017|
|Joint Return||Head Of Household||All Other Cases*|
|50%||Up to $37,000||Up to $27,750||Up to $18,500|
|0%||Over $62,000||Over $46,500||Over $31,000|
*Includes single filers, married filing separately, and qualifying widow or widower
Is it possible to make a contribution for a previous tax year?
Yes. The deadline to contribute to an IRA for a particular tax year generally is April 15 of the following year. When an individual makes a contribution to her IRA between January 1 and April 15 for the previous tax year, this is referred to as a prior-year contribution.