You have until the original due date for filing your federal 1040 to make a contribution to your individual retirement account (IRA). This year, due to Patriot’s Day, the IRS has moved the due date for filing to April 18, 2017 (normally it is April 15). Depending on the type of IRA, you may receive a federal tax deduction for the contribution.
Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, potentially tax-free. However, the annual contributions to the IRAs are limited, and any unused limit can’t be carried forward to make larger contributions in future years. The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you make smaller contributions before the deadline, you will not be able to make additional contributions after the deadline to reach the annual limit.
This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it may be a good idea to use up as much of your annual limit as possible.
Types of IRAs
If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18:
- Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax at ordinary income tax rates.
- Roth. You do not receive a tax deduction for the contribution, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.
- Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth at ordinary income tax rates. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability (a backdoor Roth contribution).
There are also state tax consequences that you should consider before making a contribution. Want to know which option best fits your situation? You can reach me at [email protected] or contact your Berdon advisor.
Hal Zemel, a Tax Partner at Berdon LLP, New York Accountants, has nearly 25 years in public accounting and advises businesses in the manufacturing, distribution, advertising, and real estate sectors.