Win 1: Added feathering of your nest egg
Most moves to reduce a tax year's final bill must be taken by the end of that tax year. Once Dec. 31 is past, so are your options to reduce what you owe the Internal Revenue Service.
IRA contributions, however, are different.
You have until the April fling deadline, which is next Tuesday, the 18th this year, to put money into your traditional or Roth IRA and have the contribution count as if it were made during the last calendar year.
Why does this calendar contribution flexibility matter? It means you can max out the amount of money you put into the IRA for every possible year. For 2016, that's $5,500 regardless of which IRA type you have; if you're age 50 or older, you can contribute an additional $1,000.
Once that 2016 contribution is taken care of, you then can max out your 2017 contributions. Mild inflation means that this year, the contribution amounts are the same as in 2016.
By putting the most you're legally allowed each year into our retirement account, you boost your chances of an earlier and more comfortable life after work.
Win 2: A possible IRA tax deduction
If your retirement money for 2016 goes into a traditional IRA, some or all of it might be tax deductible.
The amount you can claim as an above-the-line deduction directly on your Form 1040 or 1040A depends on a variety of things. The most notable things that affect deduction of your traditional IRA contribution are your income and workplace retirement options.
Your IRA deduction amount may be limited if you (or your spouse) are covered by a retirement plan at work and your income exceeds a certain amount. The income triggers for 2016 IRA deduction reductions start at $61,000 for single taxpayers; $98,000 for married couples filing jointly where the spouse making the contribution is covered by a workplace retirement plan; and $184,000 for jointly filing married taxpayers where the spouse making the contribution has no workplace plan but his/her working spouse does.
Check out my earlier post on inflation effects on IRA contributions and deductions for more on 2016 and 2017 tax years.
Win 3: Saver's Credit claim
Your IRA contribution, to either a traditional or Roth account, might qualify you to claim the Saver's Credit.
This tax break, which maxes out at $1,000, rewards low- and moderate-income individual for adding to their retirement accounts. Even better, it's a credit, which means it directly reduces your tax bill dollar-for-dollar.
You can claim the credit as long as you don't make more than the earnings limit for your filing status. For the 2016 tax year they are:
- $30,750 for singles and married couples filing separately (it increases to $31,000 for the 2017 tax year)
- $46,125 for heads of households (it's $46,500 in 2017)
- $61,500 for married couples filing jointly (it goes up to $62,000 for the 2017 tax year)
You'll figure your Saver's Credit amount on Form 8880 and then report your credit amount on line 51 if you file a long 1040 or line 34 if you use the slightly shorter 1040A.
You can find more on the Saver's Credit in IRS Publication 571.
If you haven't opened or contributed to an IRA for 2016 yet, the deadline is almost here. Get to it!
You'll be glad you did, not only this April when you file your return, but years down the road when you're enjoying exactly the type of post-work lifestyle you dreamed.
You also might find these items of interest:
- Handy retirement rollover chart
- Rethinking retirement as traditional 3-legged stool wobbles
- Most of us who plan to retire aren't yet financially ready for it