Understand Nuts and Bolts of this tax saving vehicle-Traditional IRA

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Traditional IRA-Part II

Let’s move further in our journey to understand IRA.

How much can I contribute to IRA?

For 2017, you can contribute the lesser of your earned income or $5500 for 2017. If you are age 50 or over, you may contribute an additional $1000 in 2017. Contributions to a ROTH IRA are combined with IRA contributions when determining these limits.

For 2017, married taxpayers filing a joint return can contribute up to $5500 each to an IRA if:

  • Either spouse has earned income; and
  • Together they have at least $11,000 of earned income in 2016 and 2017.

This clarifies one question that we get from our clients all the time-if the spouse is not working, we cannot save in her/his IRA. The answer is, if both of you are filing as “Married Filing Jointly” and if your total earned income is more than $11,000, you can open an IRA for non-working spouse for up to $5500.

Maximum deductible contributions are based on modified adjusted gross income (MAGI). For most taxpayers, MAGI is the same as adjusted gross income. Contributions that exceed the maximum amount allowed are subject to an excess contribution penalty of 6%.

Excess contributions withdrawn from the IRA before the tax return due date (plus extensions) are not subject to the 6% tax, provided that no deduction is taken from the amount withdrawn, however, is taxable and the 10% penalty for early withdrawal may apply to this amount.

The best way to escape from all this excess contributions calculations, is to make the contributions before filing the return, figure out the deductibility while all your income is accounted for in the tax return, and then categorize part of the contributions as nondeductible, if it applies. This way you end up saving without worrying about excess contribution penalty.

Also read: Our other blog in IRA series. 

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