Have you ever wondered about the rules regarding contributions to your IRAs? If so, you’re not alone. Here are just a few things to keep in mind:
You must meet certain requirements in order to be eligible to make contributions to IRAs. Failure to meet these requirements can result in excess IRA contributions. Excess contributions that are not properly corrected can result in double taxation and excise tax being owed to the IRS. The following are some general eligibility requirements that must be met for IRA contributions.
Eligible income required. Regular IRA contributions must be made from eligible compensation, such as W-2 wages and/or salary, commissions, self-employment income, nontaxable combat pay, and other amounts earned from working.
Special rule for spouses. If a wife, for example, does not earn income from working outside the home but is married to someone who does, her IRA contribution can be based on her working spouse’s income. In such cases, the couple must file a joint federal tax return.
Contribution limit. The dollar limit for IRA contributions is the lesser of (a) $6,000, plus $1,000 if you are age 50 or older by the end of the year, or (b) 100% of the eligible compensation you receive for the year. As a result, if you earned only $3,000 for the year, the maximum amount that can be contributed to your IRA for the year is $3,000.
MAGI limit. Contributions cannot be made to Roth IRAs if your modified adjusted gross income (MAGI) exceeds a certain amount. Roth IRA contribution limits are phased out if the MAGI falls within a certain range.
Age limit. Contributions cannot be made to your traditional IRA for the year your reach age 70½ and after. This limitation does not apply to Roth IRA contributions.
Deposit deadline. IRA contributions must be made by your tax filing due date, which generally is April 15th for calendar-year tax filers. Tax filing extensions do not apply. If you make any contributions between Jan. 1 and April 15th for the previous year, you must clearly designate which year contributions apply. Failure to include that information may result in the IRA custodian applying the contribution to the current year.
If you made IRA contributions and did not meet the income and age requirements where applicable, the contributions must be corrected under the “return of excess contributions” procedures.
Under these procedures, excess contributions must be removed by your tax filing due date plus extensions, and must be accompanied by any net income attributable (NIA) to the contributions. NIA can be earnings or losses, and are determined using an IRS-provided formula. If the IRA custodian will not perform the calculation, the formula—which can be found in IRS Publication 590, Individual Retirement Arrangements (IRAs)—can be used.
If all of this is still confusing, we’d be happy to help. Give us a call at 860-430-1009 and we’ll do our best to answer any questions you may have.
Reed Financial Planning Services, LLC is here to help you and your family with your planning needs. Reach out to us today if we can be of any assistance to you.
Partially written by Denise Appleby, APA, CISP, CRC, CRPS, CRSP
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License #: 4748934 Reprint Licensee: Scott Reed
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