By: Gene Walden, Senior Finance Editor February 06, 2017
Here are the 2017 (and 2016) rules and contribution limits to help you get the most out of your IRA. (See: Contribution and Deduction Limits & Rules for IRA and CESA or IRS.gov for more details):
You can contribute to an IRA if you (or your spouse if filing jointly) have “taxable compensation,” also known as “earned income.” The following table shows what types of income would be considered “taxable compensation” and which types would not.
Compensation for Purposes of an IRA
- wages, salaries, etc.
- self-employment income
- alimony and separate maintenance
- nontaxable combat pay
Does Not Include:
- earnings and profits from property
- interest and dividend income
- pension or annuity income
- deferred compensation
- income from certain partnerships
- any amounts you exclude from income
How much can I contribute?
For the 2016/2017 tax years, you can contribute the lesser of $5,500 (or $6,500 if you’re age 50 or older by the end of the year) or your taxable compensation for the year.
This is the maximum amount you can contribute across all your traditional and Roth IRAs. Note that Roth contributions may be limited if your earnings exceed certain limits. See below for details.
Can my spouse contribute?
Even if your spouse doesn’t work, he or she can contribute to an IRA if you’re a wage-earner. But there are limitations.
Again, you can’t contribute more than you make in taxable compensation. But if you make over $11,000 (or $13,000 if you both are over 50), you may be able to contribute the full amount for each of you to a traditional IRA. In other words, for those under 50, that would come to $5,500 per spouse for a total of $11,000.
However, keep in mind that you can’t contribute the maximum to a traditional IRA and still contribute to a Roth IRA. If you and your spouse contribute the maximum of $11,000 to traditional IRAs, you would not be able to contribute to a Roth IRA during the same tax year.
When should I make contributions?
Contributions can be made to your IRAs at any time during the calendar year and as late as the due date for filing your tax return (which is usually on or around April 15 of the following year). So, your contribution for the 2016 tax year must be made by April 18, 20171 (unless you qualify for a special extension). (See: Contributing Earlier to Your IRA Can Make a Big Difference Over Time)
That means that even if you didn’t make a traditional IRA contribution in 2016, you may still contribute this year by April 18 and could reduce your taxes on your 2016 returns.
Are there age restrictions?
You must stop contributing to a traditional IRA during the year that you turn 70 ½. If you were born on or before June 30, 1946, you cannot contribute for 2016 or any later year.
However, you may still be able to contribute to a Roth IRA, which carries no age restrictions. Although you would not benefit from current year income tax savings, a Roth IRA would offer both tax-free growth of principle and, when qualified, the tax-free withdrawal of your funds.
Are there upper income restrictions?
There are no upper income limitations on contributing to a traditional IRA, although there are income restrictions for contributing to both an IRA and a 401k plan at work (see next section).
However, there are restrictions for a Roth IRA. Single filers must make under $132,000 for the tax year 2016 and under $133,000 for tax year 2017. Married couples filing jointly must make under $194,000 for tax year 2016 and under $196,000 for tax year 2017.
What if you have a 401k plan at work?
If you already have a 401k plan at work, or are covered by another type of retirement plan (such as a pension, profit-sharing or SEP plan), your ability to benefit from a tax deduction due to your traditional IRA contribution would depend on your taxable income and filing status. For instance, if you’re filing status is single for the 2016 tax year, you get a full deduction for your contribution if you make less than $61,000, but that dissolves to no deduction if you make more than $71,000. If you’re married filing jointly, you get the full deduction if your combined annual income is $98,000 or less, but that slides to no deduction if you earn $118,000 or more. (See: Contribution and Deduction Limits & Rules for IRA and CESA)
If you earn above these income restrictions and you still want to contribute to an IRA, opening a Roth may be a better option than a traditional IRA if you meet the Roth income limits. Although a Roth IRA wouldn’t provide a tax benefit for the current year, it would grow tax-deferred, and you would have the benefit of tax-free qualified withdrawals later, whereas traditional IRA withdrawals are taxed.
What are the penalties for early withdrawal?
All contributions and earnings you withdraw from your traditional IRA are taxable. If you are under age 59 ½ you may also have to pay a 10% tax for early withdrawals, unless you qualify for an exception.
Take advantage of 2017 tax contribution limits and Open a Thrivent Funds IRA today.
At Thrivent Mutual Funds, we recommend you consult your tax advisor to make sure you’re getting the most out of your investments. Thrivent Mutual Funds and their representatives cannot provide legal or tax advice.
1 Most years the deadline is April 15, but because Emancipation Day falls on a Saturday in 2017, Monday is a holiday so the deadline was moved to Tuesday, April 18.
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