It’s almost April, which means tax season is approaching. As you prepare to file your taxes, don’t forget that you also have until April 18th to contribute to your IRA for tax year 2015. At first glance, IRA contribution limits may seem small, but IRAs are a powerful element of your retirement strategy and your contributions add up over time. First, let’s review the ABCs of IRAs.
Which types of IRAs are there?
There are several different kinds of IRAs:
- Traditional IRA: A retirement account where your contributions may be tax-deductible and your earnings grow tax-deferred.
- Roth IRA: A retirement account where withdrawals may be taken tax-free. Unlike the Traditional IRA, you can’t deduct the contribution, but earnings grow tax-deferred.
- Rollover IRA: A Traditional or Roth IRA where money from an employer-sponsored retirement plan such as a 401(k) can be transferred into a new IRA account without, in many cases, incurring tax penalties. Rollover IRAs can help make it easier to manage your portfolio by moving your assets into one place.
- SIMPLE IRA: A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA is an IRA for self-employed individuals or for small businesses
- SEP IRA: A SEP (Simplified Employee Pension) IRA is an IRA plan where employers can make tax-deductible contributions.
Before we hit April 18th, make sure you’re familiar with this tax year’s contribution limits. IRA contribution limits change every year or every few years to stay inline with the cost of living. Since inflation has been low, the 2015 and 2016 limits are the same as they were in 2014: $5,500. Remember, this limit applies to all of your Roth and traditional IRAs — not per IRA account.
If you’re age 50 or older, you can contribute an additional $1,000 to your IRA accounts, allowing you to contribute up to $6,500 for the year. The catch-up contribution is designed to help those closer to retirement age maximize their savings for retirement.
Roth IRA Limits and Backdoor Options
While the maximum contribution for IRAs is $5,500 per year (or $6,500 if you are older than 50), Roth IRA contributions are phased out for those with high modified adjusted gross income. For single filers in 2016, the income phase out threshold begins at $117,000 and ends at $133,000. Within this range, you can only make a partial contribution and once you hit $133,000, you cannot make a Roth IRA contribution. For married filers in 2016, the income threshold starts at $184,000 and ends at $194,000.
If your income is above the cutoff amounts, there is still a few ways you can contribute to a Roth IRA. One option is a backdoor Roth transaction. You first contribute to a Traditional nondeductible IRA, which is available regardless of income, and then convert it to a Roth IRA. The IRS also allows you to convert after-tax contributions to a 401(k) into a Roth IRA.
Traditional IRA Tax Deductions
If you have a workplace retirement account, you can claim a tax deduction for your IRA contributions, so long as your income does not exceed certain annual limits. The phase out range for single and head of household filers is between $61,000 and $71,000, and the phase out range for married couples is between $98,000 and $118,000.
There aren’t any income limits for those who do not have a workplace retirement account and file as a single or head of household. However, for joint filers, if one spouse does not have a workplace retirement account but another spouse does, the deduction is phased out for couples earning between $184,000 and $194,000.
If you would like to know more about IRA contributions or how to maximize the impact of your retirement accounts, get in touch with us by calling our office at 858.756.0004 or emailing us at [email protected] You can also pass along this article to your friends and family and let them know we’re happy to speak with them if they have any questions.
About Deb Sims
Deborah Sims is the Principal of Estate Management Group, a wealth management and financial services firm offering comprehensive and customized strategies to help her clients manage their assets and feel confident in their future. Her mission is to serve as her clients’ most trusted wealth advisor through professional knowledge, integrity, and personalized wealth management services. Based in San Diego, California, Deb’s team has offices in Rancho Santa Fe, Old Town, and Del Mar. She invites you to contact her team today to learn more about how they can help you.