So today I thought I’d share the tips the IRS sent out about making contributions to an IRA.
1. You must be younger than 70 1/2 at the end of the tax year in order to contribute to a traditional IRA. Note that there is no age limit for making contributions to a Roth IRA, as Kay Bell points out over at Don’t Mess With Taxes.
2. You must have taxable compensation to contribute to an IRA. This includes income from wages, salaries, tips, commissions and bonuses. It also includes net income from self-employment. If you file a joint return, generally only one spouse needs to have taxable compensation. This is particularly important to note for children. As my kids started working, they can now contribute to an IRA. It’s never too early to start saving for retirement!
3. You can contribute to your traditional IRA at any time during the year. You must make all contributions by the due date for filing your tax return. This due date does not include extensions. If you contribute between Jan. 1 and April 15, you should contact your IRA plan sponsor to make sure they apply it to the right year. The key, however, is that you can contribute to an IRA after the end of the year, something that many people don’t realize. The rationale behind this rule is that you might not know what your contribution limit will be until after year end when you know how much money you’ve made.
4. For 2012, the most you can contribute to your IRA is the smaller of either your taxable compensation for the year or $5,000. If you were 50 or older at the end of 2012 the maximum amount increases to $6,000. The limit jumps to $5,500 in 2013, or $6,500 for those 50 or older.
5. Generally, you will not pay income tax on the funds in your traditional IRA until you begin taking distributions from it.
6. You may be able to deduct some or all of your contributions to your traditional IRA. This depends on a number of factors including marital status, income and whether you or your spouse has a retirement plan at work.
7. The IRS recommends using the worksheets in the instructions for either Form 1040A or Form 1040 to figure the amount of your contributions that you can deduct. The better approach, in my opinion, is to use tax software such as TurboTax.
8. You may also qualify for the Savers Credit, formally known as the Retirement Savings Contributions Credit. The credit can reduce your taxes up to $1,000 (up to $2,000 if filing jointly). Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the Saver’s Credit.
9. You must file either Form 1040A or Form 1040 to deduct your IRA contribution or to claim the Saver’s Credit.
10. If you want even more details about IRA contributions, IRS Publication 590, Individual Retirement Arrangements, will provide more information than you can possibly imagine. It’s a page-tuner.
Finally, if you want to know where to open an IRA, check out our list of the best brokers for IRAs.