If you would like to maximize your tax-deferred assets and you have not fully funded your traditional IRA or Roth IRA for 2016, you have until April 18 to make a contribution, since the usual tax filing date of April 15 falls on a holiday weekend this year.
For those under the age of 50, the maximum you can contribute for 2016 (as well as 2017) is $5,500; if you are 50 or older you can contribute $6,500 with the $1,000 “catch-up” provision. If you’re age 70 ½ or older and still earning income, you will not be able to make an IRA contribution, though you may be able to make a Roth IRA contribution. You cannot contribute more than you earned during the year. Note that a married couple with only one employed spouse, the working spouse can contribute to a spousal IRA or Roth for the non-working spouse, as long as the earned income is at least as much as the two contributions.
If your company does not sponsor a retirement plan, or if you are not eligible to contribute to the plan (this is often the case for employees who haven’t yet met their company’s service requirement), your IRA contribution is fully tax-deductible. (As a reminder, Roth IRA contributions are not tax-deductible.)
However, if you are eligible for an employer-sponsored plan, whether or not you contribute to it, your ability to contribute to a tax-deductible IRA or a Roth may be constrained by income limitations. It’s usually better to maximize your contributions to an employer-sponsored plan first, and then fund your IRA or Roth if you’re able.
For someone filing as single or head of household, deductibility for the IRA begins phasing out at a Modified Adjusted Gross Income (MAGI) of $61,000. Contributions are fully non-deductible at $71,000 and over. If you’re married filing jointly, the phase-out begins at $98,000 MAGI and no deductions are available at MAGI of $118,000 or above. Additional details are available at the IRS website.
If you prefer to contribute to a Roth, your ability to do so begins to phase out for singles and heads of household at $117,000 MAGI and ends at $132,000. For those who are married filing jointly, the phase-out begins at $184,000 MAGI and contributions end completely at $194,000. More details can be found here.
It’s important to remember that even if your income is too high to allow you to make a tax-deductible IRA or Roth contribution while you’re under age 70 ½, you can still make a non-deductible IRA contribution. Although you don’t receive a tax deduction for the year in which you make it, the funds still grow tax-deferred so that you will not pay taxes on the earnings before you begin withdrawals. You will need to keep good records of how much you contributed in after-tax dollars, so that when you start withdrawing money from the non-deductible IRA account later, you will not be taxed on the full amount of withdrawal.