When a traditional IRA makes the most tax sense
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Saving money today for your retirement takes discipline, but you can enjoy immediate gratification in the form of a tax deduction with a traditional IRA. A big plus: You don’t have to itemize.
|Younger than 50||$5,500||$6,500|
|Age 50 or older||$5,500||$6,500|
But before the lure of lower taxes prompts you to open a traditional IRA, be aware that a contribution won’t cut your tax bill dollar for dollar. Rather, your contribution amount is subtracted from your income to help determine your taxable income — and your tax bill.
The allowable contribution amounts can be deposited into your traditional IRA as late as the annual tax-return filing deadline and still count toward cutting your prior year’s tax bill. You even can file your return before you make your contribution.
If you or your spouse has a retirement account at work, including a 401(k) plan option, a Keogh or simplified employee pension IRA, or SEP IRA, for self-employment income, you might not be able to take the full tax break of a traditional IRA. But a portion of your contribution still might be deductible, as long as your income falls below IRS limits.
For 2016 returns, a single or head-of-household filer with a company-provided pension plan can earn up to $71,000 and still get a partial IRA deduction. The earnings cap is $118,000 for joint filers where one or both spouses have a company retirement plan. If you don’t have a company plan but your spouse does, the modified adjusted gross income limit before you lose your full deduction is even higher: $194,000.
If you’ve already contributed for 2016 and want to put in money for the 2017 tax year, the contribution amounts, regular and catch-up, are the same. The 2017 income limits are higher for getting a partial IRA deduction if you also have a work-based retirement plan.
The worksheet in the Form 1040 instructions, or 1040A booklet if you file that form, will help you figure out how much of your contribution you can deduct. Of course, tax software does this calculation for you automatically.
Use Bankrate’s 401(k), 457 and 403(b) deductions calculator to see the impact of contributions to a workplace plan on your take-home pay.
Other IRA considerations
Keep in mind that you might not be able to max out your IRA contribution at the annual limit. You can contribute, and potentially deduct, only as much as you earn. If you make $3,800 this year, then that’s the most you can put in any IRA.
And if you’re 70 1/2 or older, you can’t put any more money into your traditional IRA. In fact, that’s the age when the IRS demands you start taking money out of your traditional, tax-deferred retirement account.
You can put your money in a CD once you retire, or contribute to a Roth if you’re still earning money.