Taxpayers often have questions about Individual Retirement Arrangements, or IRAs.
Common questions include: When can a person contribute, how does an IRA impact
taxes, and what are other common rules.
The IRS offers the following tax tips on IRAs:
- Age
Rules. Taxpayers must be under age 70½ at the end of the tax year
to contribute to a traditional IRA. There is no age limit to contribute to
a Roth IRA.
- Compensation
Rules. A taxpayer must have taxable compensation to contribute to
an IRA. This includes income from wages and salaries and net
self-employment income. It also includes tips, commissions, bonuses and
alimony. If a taxpayer is married and files a joint tax return, only one
spouse needs to have compensation in most cases.
- When
to Contribute. Taxpayers may contribute to an IRA at any time
during the year. To count for 2016, a person must contribute by the due
date of their tax return. This does not include extensions. This means
most people must contribute by April 18, 2017. Taxpayers who contribute
between Jan. 1 and April 18 need to advise the plan sponsor of year they
wish to apply the contribution (2016 or 2017).
- Contribution
Limits. Generally, the
most a taxpayer can contribute to their IRA for 2016 is the smaller of
either their taxable compensation for the year or $5,500. If the taxpayer
is 50 or older at the end of 2016, the maximum amount they may contribute
increases to $6,500. If a person contributes more than these limits, an
additional tax will apply. The additional tax is six percent of the excess
amount contributed that is in their account at the end of the year.
- Taxability
Rules. Normally taxpayers don’t pay income tax on funds in a
traditional IRA until they start taking distributions from it. Qualified
distributions from a Roth IRA are tax-free.
- Deductibility
Rules. Taxpayers may be able to deduct some or all of their contributions to their traditional IRA.
- Saver’s
Credit. A taxpayer who contributes to an IRA may also qualify for
the Saver’s
Credit. It can reduce a person’s taxes up to $2,000 if they file a
joint return.
- Rollovers
of Retirement Plan and IRA Distributions. When taxpayers roll
over a retirement plan distribution, they generally don’t pay tax on
it until they withdraw it from the new plan. If they don’t roll over their
distribution, it will be taxable (other than qualified Roth distributions
and any amounts already taxed). The payment may also be subject to
additional tax unless the taxpayer is eligible for one of the exceptions
to the 10% additional tax on early distributions.
- myRA.
If a taxpayer’s employer does not offer a retirement plan, they may want
to consider a myRA.
This is a retirement savings plan offered by the U.S. Department of the
Treasury. It's safe and affordable. Taxpayer’s may also direct deposit
their entire refund or a portion of it into an existing myRA.
Taxpayers should keep a copy of their tax return. Beginning
in 2017, taxpayers using a software product for the first time may need their
Adjusted Gross Income (AGI) amount from their prior-year tax return to verify
their identity.
Source: Internal Revenue Service
contact@officetaxservices.com
(858)247-1680
The Internal Revenue Service reminded taxpayers who turned age 70½ during 2016 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Saturday, April 1, 2017.
The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. It also typically applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. A taxpayer who turned 70½ in 2016 (born after June 30, 1945 and before July 1, 1946) and receives the first required distribution (for 2016) on April 1, 2017, for example, must still receive the second RMD by Dec. 31, 2017.
Affected taxpayers who turned 70½ during 2016 must figure the RMD for the first year using the life expectancy as of their birthday in 2016 and their account balance on Dec. 31, 2015. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.
Most taxpayers use Table III (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2016 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B.
Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Employees who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
The IRS encourages taxpayers to begin planning now for any distributions required during 2017. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2017 RMD, this amount would be on the 2016 Form 5498 that is normally issued in January 2017.
IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners age 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.
A 50 percent tax normally applies to any required amounts not received by the April 1 deadline. Report this tax on Form 5329 Part IX. For details, see the instructions for Part IX of this form.
Source: Internal Revenue Service
contact@officetaxservices.com
(858)247-1680
