For taxpayers who contribute to an IRA, tax time can lead to many questions regarding how those contributions may affect your taxes. If you chose to save for retirement through an IRA, there are some important things you should know.
In order to contribute to a traditional IRA, you have to be under 70 ½ years old by December 31st. Roth IRAs don’t have a contribution age limit. However, you have to have taxable income in order to contribute to any IRA. This income includes:
- Wages and salaries
- Net self-employment compensation
- Tips, commissions, or bonuses
- Alimony payments
If you file a joint return with your spouse, only one taxpayer has to meet the compensation guidelines.
While contributions can be made at any time of the year, they must be completed by the due date of the tax return in order to count for the current tax year. Not accounting for extensions, most contributions will have to be made by April 15, 2015, to be accepted for 2014. Any contributions made between January of 2015 and April 15, 2015 should be double checked for accuracy in applying it to the right year.
Typically, you can only contribute to your IRA either the smaller of two options: either your taxable compensation, or $5,500. Anyone over 50 by the end of the 2014 tax year can contribute up to $6,500. You normally aren’t required to pay taxes on money in your IRA unless you’ve started distributing the funds. Some distributions from Roth IRA are qualified to be tax-free.
Deductions of IRA contributions are only allowed if applied to a traditional IRA, as those made to a Roth IRA cannot be deducted. Additionally, contributing to an IRA may help you qualify for the Saver’s Credit, which can reduce your tax liability by up to $2,000 for those who file jointly. The Saver’s Credit is claimed through Form 8880, Credit for Qualified Retirement Savings Contributions.