If you have earned income, you can contribute to an Individual Retirement Account (IRA) by April 15th and it can count as a 2018 contribution. But before you contribute, make sure the result is what you’re expecting. I said you can contribute if you have earned income, but I didn’t necessarily say you can deduct the contribution.
If you have earned income and are not enrolled in any type of workplace retirement plan, like a 401(K), you can deduct your entire contribution. Your contribution can’t be more than your earned income and the maximum you can contribute is $5,500 for 2018 ($6,500 if you’re age 50 or older).
If you participate in a retirement plan at work, your right to make a deductible contribution begins to phase out for single taxpayers with income above $63,000, and the deductible contribution is completely phased out at $73,000 of income ($101,000 to $121,000 for married filing joint taxpayers).
Spouses with little or no earned income can still make a deductible IRA contribution in some cases. As long as your spouse has sufficient earned income to cover both contributions, a non-working spouse can contribute. The contribution is deductible as long as income on the joint return doesn’t exceed $189,000. The deduction is phased out and totally eliminated once income reaches $199,000.
There is also an incentive over and above the deduction for retirement plan contributions for lower income taxpayers. The Saver’s Tax Credit is available for single filers with adjusted gross income (AGI) of $31,500 or less (($63,000 or less for married taxpayers). Depending on your income, you can claim a tax credit worth 10%, 20% or 50% of the amount you put into your retirement plan, up to a maximum of $2,000 for singles or $4,000 for joint filers. You’re in a low tax bracket with income at this level so the deduction isn’t significant, but the addition of this tax credit makes the contribution much more beneficial to your tax bill and can make it much more affordable.
Remember that if you qualify you can still make a deductible IRA contribution by April 15th and claim a tax deduction and the Saver’s Tax Credit. See how much the contribution will save you – you might find it much more affordable than you thought and now is a great time to begin a retirement savings plan.
If you have questions about whether you can take advantage of an IRA, please call or email our office. As you can see, there are variables regarding income and whether you participate in a retirement plan at work, so it’s hard to address your specific situation without all that information, but we’re happy to assist you. As always, I am also looking for article ideas that you would like me to cover in future articles. If you have an idea for a future article, or just have a topic you would like more information on, please send me an email.
At Faw & Associates, we are always available to answer any of your tax or financial planning questions. We are accepting new clients please contact us for an appointment.At Faw & Associates, we are always available to answer any of your tax or financial planning questions. We are accepting new clients please contact us for an appointment.