By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, firstname.lastname@example.org
It’s “crunch time” for federal income taxes. While the tax filing deadline is usually April 15, it is April 18 this year due to a Washington D.C. holiday called Emancipation Day. Bottom line: taxpayers, including most military families, have an extra weekend to prepare their taxes. That’s the good news. The bad news is there is not much you can do now to lower your tax bill. Opportunities, such as charitable donations and Thrift Savings Plan contributions, and capital losses on investments, all went out the window at midnight last New Year’s Eve.
The only way that taxpayers may be able to save money on taxes now is to contribute to a tax-deferred individual retirement account (IRA). The deadline for deposits to 2015 traditional and Roth IRAs and SEP IRAs for self-employed workers is also April 18, 2016 (see https://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs). Below are some key points to know about IRAs and the tax savings that they can provide:
- There are many types of IRAs: Roth, Traditional, Rollover, and Spousal, to name a few. Not every IRA provides an initial tax deduction, but they all provide tax-deferred growth on both the amount contributed (saved) and earnings on that money. Roth IRAs also provide the potential for tax-free growth.
- The maximum contribution allowed by law for IRAs (Roth and/or Traditional) in both 2015 and 2016 is $5,500 for workers under age 50 and $6,500, with an additional $1,000 catch-up contribution, for workers age 50 and older. These numbers assume an earned income equal to these amounts. Workers can contribute the smaller of the annual limit allowed by tax law or their taxable compensation during the calendar year.
- Income limits apply to qualify to contribute to Roth IRAs. For 2015 income taxes, the adjusted gross income (AGI) phase-out range for taxpayers making contributions to a Roth IRA was $116,000 to $131,000 for single taxpayers and heads of household and $183,000 to $193,000 for married couples filing jointly.
- When workers qualify by income for a partial Roth IRA contribution, they can put the remaining amount of the contribution limit into a Traditional IRA (e.g., $2,500 Roth IRA and $3,000 Traditional IRA in 2015).
- If single workers, or both spouses in a married couple filing jointly, are not covered by an employer’s retirement plan, Traditional IRA contributions are deductible regardless of income.
- If a worker has an employer retirement plan, income limits apply to qualify to deduct a contribution to a Traditional IRA. The phase-out AGI ranges for 2015 income taxes are $61,000 for single taxpayers and heads of household and $98,000 to $118,000 for married couples filing jointly.
- If one spouse in a married couple filing jointly has an employer retirement savings plan and the other does not, the tax-deductibility of a Traditional IRA contribution phases out between an AGI of $183,000 and $193,000 in 2015. See https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work.
- If workers don’t qualify, income-wise, for either a tax-deductible Traditional IRA or a Roth IRA, they can still fund a non-deductible Traditional IRA and later convert it to a Roth IRA, if desired.
- Workers can’t make contributions to a Traditional IRA once they reach age 70½. However, they can still contribute to a Roth IRA, provided that they have earned income (e.g., salary from a job or net earnings from a small business or freelance work).
For more information about IRAs, visit this IRS page with frequently asked questions (FAQs): https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Contributions