Many tax planning deductions for 2016 are no longer available after the year end. However, there is one you might consider up until April 15th, 2017, and that is making a contribution to a traditional IRA.
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Individual Retirement Arrangements (IRAs) are one of the most popular retirement savings options for individuals looking to save for their future. Among the different types of IRAs, a traditional IRA offers several benefits, including tax-deferred growth of your savings until retirement. One of the primary components of a traditional IRA is the contribution. Understanding how much you can contribute to a traditional IRA each year and under what conditions is essential to maximize your retirement savings.

Contribution Limits

The contribution limit for a traditional IRA varies from year to year, but the maximum contribution limit for 2021 is $6,000, and individuals who are 50 years old or older can contribute up to $7,000. These limits apply to both deductible and nondeductible contributions made to a traditional IRA. It’s important to note that your contribution limit can be affected by your income, age, and employment status, so it’s essential to consult with a financial advisor to know your yearly limit.

Deductibility of Contributions

When you contribute to a traditional IRA, you can either deduct your contribution from your taxable income or choose to make a nondeductible contribution. If you are eligible to deduct your contribution, you can lower your taxable income and reduce your overall tax burden. However, not everyone is eligible for a deduction, as it depends on your income and whether you have access to an employer-sponsored retirement plan, such as a 401(k) or a pension plan.

For example, if your modified adjusted gross income (MAGI) is less than $66,000 in 2021 as a single filer (or $105,000 if married filing jointly) and you don’t have a retirement plan through work, you can deduct your entire IRA contribution. However, if you earn more than these amounts and have access to a retirement plan through work, the deductible amount begins to phase out until you are no longer allowed a deduction. On the other hand, if you make a nondeductible contribution, you won’t get a deduction but your investment will grow tax-free; however, you will need to pay taxes on any earnings when you withdraw the money.

Age Limits

Another important factor to consider when making contributions to a traditional IRA is your age. You have to be under the age of 70 ½ to make contributions to a traditional IRA. Once you reach age 72, you are required to start taking required minimum distributions (RMDs) from your account each year. These distributions are based on various factors, including your account balance, your age, and your life expectancy. Failure to take your RMDs could result in a hefty penalty from the IRS.

In conclusion, a traditional IRA can help you save for retirement while providing various tax advantages. However, it’s essential to understand the contribution limits, deductible contributions, and age limits to get the most out of your IRA. You can consult with a financial advisor to determine the right IRA and the best investment options that suit your individual needs and goals.