Chances are that you’ve either just recently filed your 2013 taxes, or will do so soon. One of the biggest ways to have a positive impact on your overall tax bill is to make tax-deductible contributions to an IRA. Even if you’re not eligible for tax-deductible contributions, making nondeductible contributions can provide significant tax savings in the future, and help you save for your retirement.
As you may already know, your eligibility to make contributions to IRAs is determined every tax year, and if you fail to maximize your contributions in a particular year, there’s no way to make up for it in following years. Annual IRA contributions are a “use it or lose it” proposition, so it’s important to make your contributions each and every year.
Standard Contribution Amounts. For 2014, the limit for an individual’s contributions to their IRAs is $5,500 (in aggregate across all accounts, not $5,500 per account). This amount is unchanged from 2013. The annual “catch-up” additional contribution for individuals aged 50 and over also remains unchanged at $1,000.
Deductibility for Traditional IRAs. Depending on your modified adjusted gross income (MAGI), and whether you are covered by a retirement plan at work (such as a 401(k)), the contributions you make to a traditional IRA may be tax deductible.
- Individuals who are not covered by a workplace retirement plan are eligible for full tax deductibility of their contributions, regardless of their MAGI.
- For single individuals who are covered by a plan at work, IRA contributions are fully deductible for a MAGI of up to $60,000 (with a gradual deductibility phase out between $60,000 and $70,000). This represents an increase of $1,000 over the levels from 2013.
- For married couples filing jointly, where the contributing spouse is covered by a workplace plan, full deductibility is available for a MAGI of $96,000 (with a deductibility phase out between $96,000 and $116,000), also up $1,000 from 2013. If the contributor is not covered by a workplace plan, but their spouse is, then full deductibility is available for a MAGI of up to $181,000 (with partial deductibility from $181,000 to $191,000), which represents a $3,000 increase over last year.
Note that these figures only relate to the deductibility of contributions, not eligibility for contributions. In general, any individual with earned income can contribute to a traditional IRA in an amount not exceeding that earned income. In contrast, being able to make contributions to a Roth IRA (which are not deductible) will depend on your MAGI.
Roth IRA Eligibility. In 2014 the eligibility for individuals to make contributions to a Roth IRA also increased. Single taxpayers with a MAGI of $114,000 can make a full contribution, and those with a MAGI between $114,000 and $129,000 can make a lesser contribution. This is a $2,000 increase over 2013. Married taxpayers can make full contributions where their MAGI is $181,000 (and lesser contributions for a MAGI between $181,000 and $191,000), which represents a $3,000 over last year.
Finally, note that while there are income limits for making contributions to a Roth IRA, there are no longer any income limits for taxpayers to convert Traditional IRAs to Roth accounts. This can be a very valuable and useful tax planning tool. Contact an IRA custodian such as Quest Trust Company for more information.