Financially,
many of us associate April with taxes – but we should also associate April with
important IRA deadlines.
*April 1 is the absolute deadline to
take an initial IRA Required Mandatory Distribution (RMD).
*April 15 is the deadline for making
annual contributions to a traditional or Roth IRA.1,2,7
Let’s discuss
the contribution deadline first, and then the deadline for that first RMD
(which affects only those IRA owners who turned 70½ last year).
The earlier you make your annual IRA contribution, the better. You can make a yearly Roth or traditional IRA contribution anytime
between January 1 of the current year and April 15 of the next year. For
example, you can make your IRA contribution for 2014 anytime from January 1,
2014-April 15, 2015. The IRA
contribution window for 2013 is January 1, 2013- April 15, 2014.1
So you have more
than 15 months to make your IRA contribution for a given year. But why wait?
Savvy IRA owners pour new money into their accounts each January – as early as
they can – to give those dollars more months to grow and compound. However, for those on the bubble of eligibility should generally wait until a draft tax return is prepared to avoid having to do cumbersome fixes.
You cut your income tax bill by contributing to a deductible
traditional IRA. That’s because you are funding it
with after-tax dollars. To get the full tax deduction for a 2014 traditional
IRA contribution, you have to meet one or more of these financial conditions:
- You aren’t eligible to participate in a workplace retirement plan.
- You are eligible to participate in a workplace retirement plan, but you are a single filer with adjusted gross income of $59,000 or less. (Or if you file jointly with your spouse, your combined AGI is $95,000 or less.) Given the low thresholds, not many can contribute.
- You aren’t eligible to participate in a workplace retirement plan, but your spouse is eligible and your combined 2014 gross income is $178,000 or less.2,3 This often works well for many families where one spouse works and one does not.
If you are the
initial owner of a traditional IRA, by law you are required to stop making
contributions to that IRA starting in the year you turn 70½. If you are the
initial owner of a Roth IRA, you can contribute to it as long as you live.4
If you are making a 2013 IRA contribution in early 2014, be aware of
this fact. You must tell the investment company hosting the
IRA account what year the contribution is for. If you fail to indicate the tax year that
the contribution applies to, the custodian firm may make a default assumption
that the contribution is for the current year (and note exactly that to the
IRS).1
So, write “2014
IRA contribution” or “2013 IRA contribution” as applicable in the memo area of
your check, plainly and simply. Be sure to write your account number on the
check. Should you make your contribution electronically, double-check that
these details are communicated.
How much can you put into an IRA this year? You can contribute up to $5,500 to a Roth or traditional IRA for the
2014 tax year (just as you could for the 2013 tax year). If you are age 50 or better another $1,000 can be contributed. Should you contribute in excess of $5,500, you will not be rewarded for it: you
have until the following April 15 to correct the contribution with the help of
an IRS form, and if you don’t, the amount of the excess contribution will be
taxed at 6% each year the correction is avoided.5
If you earn a
lot of money, your maximum contribution to a Roth IRA may be reduced because of
income (MAGI) phase-outs, as follows.6
2013 Tax Year 2014
Tax Year
Single/head of
household: $112,000-127,000 Single/head
of household: $114,000-129,000
Married couples:
$178,000-188,000 Married
couples: $181,000-191,000
You can’t make a
Roth IRA contribution if you are married filing separately with MAGI of $10,000 or more and lived with your spouse in any part of a
year.6
A last-chance RMD deadline rolls around on April 1. If you turned 70½ in 2013, the IRS gave you a choice: you could a)
take your first Required Minimum Distribution from your traditional IRA before
December 31, 2013, or b) postpone it until as late as April 1, 2014.7
If you chose b),
you will have to take two RMDs this year – one by April 1, 2014 and another by December
31, 2014. (For subsequent years, your annual RMD deadline will be December 31.)
The investment firm hosting your IRA should have already notified you of this
consequence, and the RMD amount(s) – in fact, they have probably calculated the
RMD(s) for you.7
Original owners
of Roth IRAs will never face this issue – they are not required to take RMDs.7
Best Regards,
Kevin Kroskey, CFP®, MBA
This article adapted with permission from MarketingLibrary.net, Inc.
Citations.
1 - taxmap.ntis.gov/taxmap/pubs/p590-005.htm
[1/16/14]2 - turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/Tax-Tips-After-January-1--2014/INF12070.html [3/8/13]
3 - money.cnn.com/retirement/guide/IRA_traditional.moneymag/index2.htm [1/16/14]
4 - money.cnn.com/retirement/guide/IRA_Roth.moneymag/index3.htm [1/16/14]
5 - finance.yahoo.com/news/over-contributed-ira-401-k-151500104.html [1/2/14]
6 - irs.gov/publications/p590/ar01.html [2013]
7 - foxbusiness.com/personal-finance/2014/01/02/missed-your-ira-rmd-deadline-here-what-to-do/ [1/2/14]