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If you do not participate in your employer's retirement plan, you have up until April 18, 2017 to make a traditional IRA contribution which would be fully deductible on your 2016 income tax return.

For 2016 and 2017, the IRA contributions are limited to the lesser of the following:
  • $5,500 ($6,500 if you're age 50 or older) or,
  • Your taxable compensation for the year
In general, an IRA contribution is allowed only if the taxpayer has compensation. "Spousal" IRAs are an exception. That is, "Spousal" IRAs allow a contribution to be made for a nonworking spouse. Under these rules, the amount that a married couple can contribute to an IRA for a nonworking spouse is the same limit that applies for the working spouse. Assuming each spouse is under 50 years of age, as long as the couple together has at least $11,000 of earned income, $5,500 can be contributed to an IRA for each, for a total of $11,000.

If you or your spouse are covered by an employer retirement plan, you may still make contributions to a traditional IRA, however, the deductible amount of the contribution may be limited or totally non-deductible based on your income levels.

The Roth option
In addition to the traditional IRA, another option is a Roth IRA. The amount of contribution that a taxpayer may make to a Roth is subject to the same limitations as above, therefore a taxpayer may contribute up to $5,500, $6,500 if the taxpayer is 50 or older. Roth IRA contributions are never tax deductible, however the earnings can grow and be withdrawn tax-free under the Roth distribution rules. Unlike a traditional IRA, individuals that have reached the age of 70 ½ may continue contributing to a Roth IRA. In addition, unlike traditional IRAs, there are no required minimum distributions beginning at age 70 ½ associated with Roth IRAs, so this could be an effective long-term planning tool.

Similar to deductible IRAs, the amount an individual may contribute to a Roth IRA may be reduced based on the amount of income the individual earns. If an individual is in a situation where the Roth contribution limit is reduced to zero, one available strategy is to make a nondeductible IRA contribution, then convert the traditional IRA to a Roth IRA. Individuals are able to convert amounts from a traditional IRA to a Roth IRA, regardless of income level or filing status. However, caution should be exercised in situations where the individual has multiple IRA accounts so as not to trigger an income tax upon the conversion of the traditional IRA to the Roth IRA.

If you think a last minute IRA contribution may be an option for you, contact your local UHY LLP professional.

By Alison Dunleavy, CPA