Photo Illustration IRA Contribution Limits

Sometimes it’s hard to think about making those IRA contributions and taking the time out to understand IRA contribution limits because, well, retirement seems so far off. But the U.S. tax structure has several incentives that make both Roth and traditional IRAs worth the look. It also pays to make sure you know about deductions relating to your income level, so we’ll deal with that here as well.

IRA contribution limits

For tax year 2016, the contribution limits on IRA contributions are:
• Under age 50: $5,500
• Age 50 or older: $6,500

According to the IRS, if you mistakenly go over the 2016 IRA contribution limit, you have until your taxes are due to take it out or face a 6% tax on the extra for every year it’s in your account.

IRA contribution deadlines

The good news is the deadlines for contributing to your traditional Individual Retirement Account fall under the current year’s tax filing deadline. That means this year you have until April 17, 2017, to play catch up on your 2016 IRA contributions (it’s the 17th because the official Tax Day is a Saturday in 2017.) 2015 contributions were accepted until April 18, 2016.

This comes in handy in two ways:
1. If you fell behind your contributions, “catch-up” periods after the calendar year let you make the full contribution allowed by law without penalty.
2. If, when doing your taxes, you discover you owe taxes — and you haven’t made the full IRA contribution yet — you can add more to a traditional IRA tax-free to reduce the amount owed, without penalty.

How much this will help your taxes depends on two factors:

  • If you and your spouse are covered by a retirement plan at work
  • Your income.

(As we explain later, contributions to Roth IRAs are taxed in the year you make them.)


Important note: If you plan to file for an extension to the tax return filing date, understand that the extension does not apply to any traditional IRA contributions. Those contributions must be finished by April 17, 2017, to apply to the 2016 tax year.


You can contribute to your traditional IRA any time during the year, as well as up to the filing deadline in the following year. But if you do contribute in the new calendar year, make sure your IRA plan sponsor credits it to the correct tax year. The IRS page Top Ten Tips on Making IRA Contributions is helpful.

Related >> Which is better a traditional IRA or a Roth IRA?

Roth IRA contribution limits

The difference between a Roth IRA and a traditional IRA is that traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make the contribution. Withdrawals you make in retirement are taxed at ordinary income tax rates. Contributions to Roth IRAs are taxed, but earnings and withdrawals made in retirement are typically tax-free.

The other major difference between the two is what happens on the back end.

Traditional IRAs require you to start withdrawing at age 70 1/2. Roth IRAs don’t mandate withdrawals — ever. So, if you don’t need the money to keep your golden years golden, Roth IRAs can continue to grow tax-free throughout your lifetime and you can leave them to someone in your estate. Beneficiaries of Roth IRAs don’t owe income tax (but may owe estate taxes) on withdrawals and can stretch out distributions.

If you have or are thinking of starting a Roth IRA, the contribution deadline for the 2016 tax year is the same as a traditional IRA — you can contribute until April 17, 2017.

Keep in mind that Roth IRAs require the first contribution be made at least five years before qualified distributions begin. If you are looking to retire in 2021, now is the time to start.

Related >>How to open a Roth IRA

SEP IRA contribution limits

If you have a Simplified Employee Pension (SEP), the same contributing deadline applies as a traditional IRA — April 17, 2017. However, with a SEP, “if you obtain an extension for filing your tax return, you have until the end of that extension period to deposit the contribution, regardless of when you actually file the return,” according to the Internal Revenue Service.

A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA). SEPs are also a great tool for the self-employed to save for retirement.

If you don’t have a SEP for your business or yourself, but think it might be the right plan for you, the IRS says you can set up a SEP plan for a year as late as the due date (including extensions) of your business’s income tax return for that year. So that means if you plan on filing your 2016 tax returns by the deadline of April 17, 2017, then you have until that date to set up the plan. If you file for an extension and it is granted, you have until the end of the extension to create the plan. Even if you end up filing your return before the end date of the extension, the IRS says you have until that actual drop-dead date to either set up the SEP or contribute to an already existing one.

Related >> SEP IRA versus a self-employed 401(k)

Savings Incentive Match Plan for Employees (SIMPLE) IRA

Similar to the SEP is the Savings Incentive Match Plan for Employees IRA or SIMPLE IRA. This is a type of traditional IRA for small businesses and self-employed individuals. Your contributions are tax deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement. Employer contributions must be made by the employer’s tax-filing deadline, including extensions.

According to the IRS, the amount an employee contributes from their salary to a SIMPLE IRA cannot exceed $12,500 in 2016. The employer is generally required to match each employee’s salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee’s compensation.

An employer can choose an alternative to the matching, and make what’s called ‘non-elective contributions’ of 2% of each eligible employee’s compensation. If this method is implemented, the company must make non-elective contributions even if the employee chooses not to make salary reduction contributions.

Related >> Overcoming your fear of investing

Tax Deductions for Traditional IRA

Contributions to your Traditional IRA can be tax-deductible, but this depends on two factors:

  • Your income
  • If you are also covered by a 401(k) or other retirement plan at work

If you have a retirement plan at work:

  • Deductions are limited for you and your spouse (if married)

If you do not have a retirement plan at work:

  • Full deduction allowed by both spouses based on income

Here are the income limits according to the IRS if you have a retirement plan at work:

Filing Status Modified AGI* Deduction Allowed
single or
head of household

$61,000 or less

a full deduction up to the amount of your contribution limit

more than $61,000 but less than $71,000

a partial deduction

$71,000 or more

no deduction

married filing jointly or qualifying widow(er)

$98,000 or less

a full deduction up to the amount of your contribution limit

 more than $98,000 but less than $118,000

  a partial deduction

 $118,000 or more

 no deduction

married filing separately

 less than $10,000

  a partial deduction

 $10,000 or more

 no deduction

Source: IRS

*Your modified adjusted gross income is your adjusted gross income on the bottom of your return with some adjustments. Use this IRS worksheet to calculate your MAGI.

If you are not covered by a retirement plan at work:

 

Filing Status Modified AGI Deduction Allowed
single, head of household, or qualifying widow(er)

 any amount

a full deduction up to the amount of your contribution limit

married filing jointly or separately with a spouse who is not covered by a plan at work

 any amount

a full deduction up to the amount of your contribution limit

married filing jointly with a spouse who is covered by a plan at work

$184,000 or less

a full deduction up to the amount of your contribution limit

more than $184,000 but less than $194,000

a partial deduction

$194,000 or more

no deduction

married filing separately with a spouse who is covered by a plan at work

 less than $10,000

 a partial deduction

 $10,000 or more

 no deduction

Source: IRS

Looking ahead to 2017

While 2017 contribution limits have not yet been released, that hasn’t stopped financial analysts from predicting them, a boon for all those folks who love to plan ahead.

“The government released the official CPI number for July. Because of rounding rules, I’m able to safely project the 2017 contribution limits for various retirement plans and IRAs. Inflation is very low this year. For the most part, the limits in 2017 will stay the same as in 2016,” writes Harry Sit at the Finance Buff.

Sit is predicting only a small amount of increases in the deductible IRA income limits for 2017, but none more than $2,000, so keep focused on contributing as much as possible and to the maximum amount possible.

In case you are also looking for this: The dollar limitations for tax year 2016 for retirement plans such as 401(k) remain unchanged.

401(k)/403(b)/457 Elective Deferral Limits

The elective deferral (contribution) limits for these plans are the same as last year — unchanged at $18,000.

Also the same: Catch-up contribution limits if you are over 50 is $6,000 for 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan.

For more see the IRS’ 2016 Pension Plan Limitations announcement.

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