With the individual tax-filing deadline date of April 18, 2017 for the 2016 taxable year quickly approaching, reviewing some of the ways one can save taxes as well as boost his or her retirement savings is always helpful. Below are a few ways one can use the IRA contribution regime to help save taxes as well as enhance one’s retirement nest egg.
Still Time to Make IRA Contributions for 2016: The maximum IRA contribution is $5500 or $6500 if over the age of fifty and will remain the same for 2017 contributions. The deadline for making IRA or Roth IRA contributions for 2016 is April 18, 2017. The contribution must be made by such date even if the taxpayer has filed an extension. Contributions can be made in pre-tax, after-tax or Roth, if applicable.
Don’t Forget About Spousal IRA Contributions: Many married taxpayers are not aware that if one spouse is not working and the other spouse has earned sufficient income, the working spouse can make IRA contributions for the nonworking spouse. In general, a nonworking spouse can make a deductible IRA contribution of up to $5,500 for 2016 ($6,500 if age 50 or older as of 12/31/16) as long as the couple files a joint return, and the working spouse has earned income that equals are exceeds the sum of the nonworking spouse’s contribution plus the working spouse’s contribution. However, if the working spouse is covered by a qualified retirement plan (via a job or self-employment), the deductibility of the nonworking spouse’s contribution is subject to phase-out based on joint adjusted gross income.
Be Aware of the Savers Tax Credit: Low- and moderate-income taxpayers are incentivized to save for retirement by becoming eligible to claim the saver’s credit, which can be worth up to $2,000 for individuals and $4,000 for couples. People age 18 and older who are not full-time students or dependents on someone else’s tax return can claim this tax credit until their adjusted gross income exceeds $62,000 for couples in 2016.
Not Too Late for Employer SEP IRA Contributions. For sole proprietors or small business owners looking to make more substantial IRA contributions than $5500 or $6500, if over the age of 50, the SEP IRA could be your answer. For 2016, an employer can make contributions to a SEP IRA up to the lessor of 25% (20% if sole proprietor or single member LLC) of the employee’s compensation or $53,000. The limit increases to $54,000 for 2017. SEP IRA contributions for the 2016 taxable year can be made by April 18, 2017 or up until the date of the tax filing extension date, if applicable.
Contributing to a pre-tax IRA or qualified retirement plan, such as a 401(k), can prove to be a great way of saving for retirement while at the same time reducing ones tax liability. The IRA contribution regime was designed by Congress to incentivize Americans to save for retirement by granting a tax-deduction for the pre-tax IRA contribution as well as offering the ability to defer taxes on any IRA income/gains until a future date. The good news is that there is still plenty of time for taxpayers to take advantage of these benefits.