By Doug York, CPA & Partner, Rodefer Moss & Co, PLLC
When to contribute to your 2016 Individual Retirement Accounts is a taxing and spending decision. So, potentially, is determining how much to contribute. The deadline is April 18 for tax year 2016 IRA contributions. That’s three days beyond the normal April 15 tax day deadline because of Emancipation Day, a holiday in Washington, D.C.
To take advantage of growth in an IRA, it’s usually better to make your contributions as early in the tax year as possible.
But this isn’t always financially feasible, which makes the deadline reaching into the following year a benefit for retirement savings. How much should you contribute? Given the challenges of retirement, the need for consistent income, and a general desire to maintain a similar standard of living once you stop working, you will probably want to contribute as much as you can up to the allowable limit.
Time Magazine in March 2016, in an article on retirement planning, said that even as lifespans lengthen, some 56 percent of Americans have less than $10,000 in retirement savings. Only 18 percent had put away more than $200,000.
An IRA enables you to pay yourself during your growth and peak earning years so that you’ll be able to pay yourself as you ratchet back your work schedule or retire altogether. How much you contribute today will have direct bearing on your quality of life later.
IRA contribution limits for tax year 2016 are $5,500 for taxpayers up to age 50, and $6,500 for taxpayers age 50 or older.
As Americans typically don’t save enough for retirement, the extra $1,000 gives people of greater age an opportunity to make up lost savings ground. The limit starts to phase out if your income is over $99,000 married or $62,000 single. Also you may not be able to contribute if you or your spouse has a 401(k) or other retirement plan.
Tax consequences come into play if you make IRA contributions above the allowable limits.
There is a six percent tax on IRA contributions that exceed the contribution limits. For example, if you’re older than 50 and put $7,500 in your IRA for 2016, you’ll be taxed $60 every year the extra contribution remains in your IRA.
IRA contribution limits don’t apply to rollover IRAs (putting your IRA money into another IRA plan). The rollover rules are expanded for military reservists called to active duty by allowing them up to two years to roll over a distribution.
Roth IRA contributions, as opposed to traditional IRAs, are made with money on which you’ve already paid taxes, making it tax-free when withdrawn. If you have both a Roth IRA and a traditional IRA, you are restricted to the same total $5,500 contribution limit as if you only had a traditional IRA. However, the phase-out doesn’t start until $184,000 for married couples and $118,000 if you’re single.
When it comes to withdrawing IRA funds, another deadline exists.
If you turned 70½ in 2016, you have until April 18, 2017, to take your required minimum distribution. This is true for each IRA in which you participate. The IRS provides a worksheet on how to figure your minimum required distribution.
There’s a hefty 50 percent excise tax on all or part of any required minimum distribution you fail to withdraw from your IRA. Again, this doesn’t apply to a Roth IRA. IRA owners who’ve reached required minimum distribution age can avoid tax on up to $100,000 by electing to transfer funds to a charity. This benefit was made permanent last year.
There are 13 days (maybe less by the time you read this) left in which to make these decisions, if you haven’t already.
As with IRAs and so many other financial instruments, there can be nuances atop nuances. Talk to your accountant or financial planner to think through the best strategy for your present and future.
Rodefer Moss is a three-state accounting firm with offices in New Albany, Corydon, and Georgetown, Ind., Louisville, Ky., and four offices across Tennessee. The firm’s website is www.rodefermoss.com.