Investing in your retirement is important. When it comes to saving for your future, you have a multitude of options. One option, the Individual Retirement Arrangement (IRA), factors in at tax time regarding contributions that you make. Since this is a popular retirement plan, you should be aware of the following seven facts in order to make the most of your IRA savings.
- To contribute to a traditional IRA, you’re required to be 70 ½ years old by the end of the tax year. Roth IRAs don’t have age restrictions.
- You’re required to earn taxable income to contribute to an IRA. If you file a joint return, only one of you are required to earn taxable income, and it can come from any source, such as self-employment income, wages, tips, commissions, alimony, and bonuses.
- You’re able to contribute at any point throughout the year to your IRA. If you want the contribution for the year in which you’re filing your return, you have to contribute by the date the return is due, without extensions. The most common deadline is April 15th, and any contributions made between January 1st and April 15th, double check to make sure that the contribution is applied to the right tax year.
- Many IRAs have limits to the amount of contributions that can be made. In most cases, you can contribute either the taxable compensation amount, or $5,500, depending on which amount is smaller. Contributors over 50 have an increased limitation of $6,500. Contributions over the limit are subject to additional taxes starting at 6%.
- Typically, you don’t have to pay taxes on the amount saved in a traditional IRA until distributions begin. Additionally, some distributions from a Roth IRA are tax-free.
- Contributions are only deductible if made to a traditional IRA. Use the worksheets on your Form 1040 or Form 1040A to determine your eligibility for deduction.
- The Saver’s Credit can lessen your taxes up to $2,000 if you file a joint return.