Taxpayers frequently have questions about individual retirement savings plans, or IRAs, for their acronym in English. Common questions include: When can a person contribute? How does an IRA affect taxes? And What are other common rules?
The IRS offers the following tax advice for IRAs:
Age rules. Taxpayers must be under 70 ½ years old at the end of the tax year to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.
Income rules. The taxpayer must have taxable income to contribute to an IRA. This includes income from wages and salaries and net income from self-employment. It also includes gratuities, commissions, bonuses and alimony. If a taxpayer is married and filing a joint tax return, only one spouse must have income, in most cases.
When to contribute. Taxpayers can contribute to an IRA plan anytime during the year. To qualify for 2016, the person must contribute by the due date of their tax return. This does not include extensions. This means that most people must contribute by April 18, 2017. Taxpayers who contribute between January 1 and April 18 must tell the plan sponsor what year they want to apply the contribution (2016 or 2017 ).
Limit of contributions. Generally , the most taxpayers can bring to their IRA plans in 2016 is the lesser of either their taxable income for the year or $ 5,500. If the taxpayer is 50 years of age or older by the end of 2016, the maximum amount he can contribute increases to $ 6,500. If a person contributes more than these limits, an additional tax will apply. The additional tax is six percent of the amount contributed in excess that is in your account at the end of the year.
Taxable rules. Typically, taxpayers do not pay income tax on the funds in a traditional IRA until they begin to receive distributions from it. Qualified distributions of a Roth IRA plan are tax free.
Rules of deduction. Taxpayers will be able to deduct (in English) some or all of their contributions to their traditional IRA plans. See IRS Publication 590-A .
Credit of the saver. A contributor who contributes to an IRA plan may also qualify for the Saver Credit . You can reduce a person’s taxes up to $ 2,000 if filing a joint return. Use Form 8880 , Qualifying Contribution Credit for Retirement Savings Plans, to claim the credit. The taxpayer may file Form 1040A or 1040 to claim the saver’s credit.
Reinvestment savings plans for IRA withdrawals and distributions. When a taxpayer reinvests a retirement savings plan distribution, he generally does not pay taxes on the amount until he withdraws it from the new plan. If you do not reinvest the distribution, you will be taxable (apart from qualified distributions of Roth-type plans and any amount already assessed). Payment may also be subject to additional taxes, unless the taxpayer meets the requirements of one of the exceptions to the 10% additional tax on early distributions.
MyRA. If the taxpayer’s employer does not offer a savings plan for retirement, they may wish to consider a myRA . This is a retirement savings plan offered by the United States Department of the Treasury. It is safe and economical. Taxpayers could also directly deposit their full refund or a portion of it to an existing myRA.
All taxpayers must keep a copy of their tax return. Beginning in 2017, taxpayers using a software program for the first time may need the amount of their adjusted gross income (AGI) from their previous year’s tax return to verify their identity. Taxpayers can learn more about how to verify your identity and electronically sign tax returns in Verify your tax return after filing electronically .