At the beginning of each new year, after we get past the holidays, the tax season starts. This inevitably leads to questions about IRAs, limits, deadlines and other important info.
You may be facing these questions now, so let's take a brief look at IRAs, their deadlines and important dates.
To start with, just in case you have been on another planet for the last several years, there's two kinds of IRAs; the Traditional IRA and the Roth IRA. They’re treated differently for tax purposes, but both have the same contribution limits and deadlines.
The U.S. Treasury recently came out with the myRA, a retirement savings account which is essentially a Roth IRA which invests in a new US Treasury security. Other than that, it is not very exciting. So we will focus on the two main IRAs.
For 2015, contribution limits to Traditional and Roth IRAs cannot exceed $5,500 (same as 2014). This is a combined total so unfortunately no, you cannot add $5500 to both in one year for a total of $11,000 – it’s $5500 grand total for both. If you are age 50 or older, you are allowed an additional $1,000 catch-up contribution, which makes the total $6,500 for the year.
For 2015 you have until April 15, which is a Wednesday, to make your 2014 contribution. But unless you like standing in lines and dirty looks, I would not wait until the last day to make your contribution. Keep in mind, any kind of delay or error may cause your contribution to be pushed into the next calendar year, so please avoid headaches and don't wait until the last minute to make your contribution!
Another important date is April 1st - of the year following the year you turn age 70 1/2. This is the date that your first required minimum distribution (RMD) must be taken out by. Subsequent RMDs must be taken out by December 31st of each year or you face a stiff 50% penalty! If this seems confusing, welcome to the club.
One thing I've always found ironic is the elderly are expected to remember these complicated rules or else they may pay a 50% penalty, one of the harshest penalties in the tax code! Shouldn't we be putting less burdens on our senior citizens? Just my opinion.
The charts below summarize what we have talked about:
A Traditional IRA contribution may be tax deductible. It depends if you are covered by a plan at work, and how much you make. If you come in below the phase-out range, you get a full deduction, above the phase-out range, no deduction, and in between you get a partial (phase-out) deduction. Use the chart below as a guideline:
Roth IRAs are too good to be true (qualified distributions are tax free!). In fact, so good, if you make too much money, you’re phased out! The following chart will help show if you have been phased out:
The source for these 2015 numbers is IRS Information Release IR-2014-99.
If you’ve been phased out for a Roth contribution, there’s always a conversion possibility, but that is for another day, another blog! As always, it’s a good idea to run these ideas past your tax preparer.
Thanks for reading!
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