If you are thinking about skipping a 2016 IRA contribution because it’s not tax deductible – Think Again! Contributing to a non-deductible traditional or Roth IRA means growth that is never taxed. The earlier you begin investing in an IRA the longer you receive the benefit of tax-free growth.
Three common questions about IRAs:
How Much Can I Contribute?
Your maximum contribution amount for 2016 is $5,500 and an additional $1,000 for ages 50 or above. The contribution amount is based on filing status and modified adjusted gross income. For example, in 2016 a single taxpayer can make the maximum contribution up to a modified adjusted gross income amount of $117,000. Contributions are reduced the higher the income. In addition, don’t forget about checking with your employer to see if you can contribute any more into your employer- sponsored §401(k) plan, §403(b) plan or §457(b) plan before the year ends.
Can I Convert a Traditional IRA to a Roth?
If your income decreases and you fall into a lower bracket you could consider “converting” nondeductible traditional IRA funds into a Roth IRA and pay less tax in the year of conversion. You could pay less tax on the growth or perhaps no tax if your income has really dipped in a particular year or years. The conversion can be done in pieces and is not an all or nothing approach.
What About Distributions?
When you do start taking distributions on your IRA after age 59½, only some of it will be taxed and some will be a tax-free return of your investment. Distributions taken before age 59½ are subject to a 10% early withdrawal penalty.
These plans allow tax deferral and permit tax savings in the current year with the growth deferred into another period when distributions are received. For issues and questions dealing with a Roth IRA, nondeductible IRA and employer sponsored plans, contact me for more details.