At tax time, you may find yourself considering the affect your IRA contributions may have on your taxes. If you’re planning to fund your retirement through the savings you’ve contributed to an IRA, you should be aware of what will be expected each tax season.
Traditional IRAs require the contributor to be under the age of 70 ½ by the last day of the year (December 31st), where Roth IRAs are not subject to a contribution age restriction. You are required to have taxable income if you want to save for retirement using an IRA. Wages, salaries, net self-employment profits, tips, commissions, bonuses, and any money received in alimony are all considered as taxable income.
Only one spouse is required to meet the compensation requirements for couples who file a joint return.
IRA contributions must be completed by the deadline for the tax return in order to be considered for the current tax year. Contributions can typically be made at any time during the year, but in order to be processed for the 2014 tax year, most taxpayers would have to contribute by April 15, 2015. This deadline doesn’t account for any extensions that may have been granted. If you make a contribution between January and April, you should take extra caution to ensure you are applying it to the correct year.
You are usually only able to contribute one of two options to your IRA, depending on which is less: either your taxable compensation amount, or $5,500. If, at the end of 2014 you are over the age of 50, you are able to contribute a maximum of $6,500. Taxes are not assessed on funds in an IRA until distributions begin, in most scenarios. Depending on the circumstances, some distributions from a Roth IRA may be eligible to be tax-free.
IRA contributions can only be deducted on traditional IRA. Roth IRA contributions cannot be deducted. Remember, if you save through an IRA, you may qualify to claim the Saver’s Credit, which can lower your taxes by up to $2,000 (married, joint filers). You can use Form 8880, Credit for Qualified Savings Contributions to claim the Saver’s Credit.