Yes, we are nearing the 2017 tax filing deadline, but did you know April 17th is also the cutoff date for completing an IRA, a Roth IRA, or a Backdoor Roth IRA contribution for the 2017 tax year?
Tuesday, April 17, 2018 is the tax filing deadline for all 2017 tax returns, which means you must complete your IRA, Roth IRA, or Backdoor Roth IRA contribution prior to filing your taxes.
If you want to make a contribution, you must do so before filing your 2017 tax return.
The IRA/Roth IRA contribution limits for the 2017 tax year remain the same as the 2016 limits:
Individuals may contribute up to $5,500 to an IRA or a Roth IRA
Individuals over 50 years of age enjoy an additional $1,000 catch-up contribution, bringing their annual contribution limit to a total of $6,500
It’s important to remember 2017 Roth IRA contribution phase-outs exist for households with an Adjusted Gross Income that exceeds:
$118,000 - $133,000 for Single Individuals
$186,000 - $196,000 for Married Couples Filing a Joint Tax Return
$0 - $10,000 for Married Couples Filing Separate Tax Returns
In addition, 2017 IRA deductibility phase-outs exist for households without a covered employer plan and with an Adjusted Gross Income that exceeds:
$62,001 - $71,999 for Single Individuals Receiving a Partial Deduction
$99,001- $118,999 for Married Couples Filing a Joint Tax Return and Receiving a Partial Deduction
Less than $10,000 for Married Couples Filing Separate Tax Returns and Receiving a Partial Deduction
One noteworthy tax arbitrage strategy applies to a portion of the corporate executives and professionals we serve. These individuals have some working income from consulting, and either took a lump sum pension or have not yet begun receiving their annuity pension. Because these individuals have earned income, they are eligible to contribute to an IRA and receive a deduction at the higher 2017 tax rates. Not only may they contribute to an IRA based on their earned income, but their spouse may be able to use spousal income to contribute as well. Let’s walk through an example:
Let’s say Susan’s consulting income for 2017 was $98,000. She will be able to receive a tax deduction based on the 2017 tax rate of 25%. In 2018, the same income level would be taxed at a 22% rate due to the marginal rate changes from the Tax Cuts & Jobs Act. If Susan needs the money (and is over 59.5), she can immediately withdraw the funds in 2018 and only pay taxes at a 22% rate. That is a 3% tax savings for Susan and her spouse. Alternatively, if Susan does not need the money, she could immediately convert the funds into a Roth IRA, paying taxes at the lower 22% rate. Again, Susan received a 3% tax savings! Not only has this couple reaped the benefits of a rare tax arbitrage opportunity, they will also enjoy the tax-free growth this contribution will yield since it is now nested inside of the Roth IRA.
Please reach out to us if you would like discuss making a contribution to an IRA or Roth IRA and how it may be an important piece of your retirement savings plan. If you want to make a Roth IRA contribution, but are concerned you will exceed the Roth IRA contribution limits for the 2017 tax year, read our article about the Backdoor Roth Contribution Strategy here. You may be able to max out contributions to your 401(k) and in addition, contribute money to an IRA, Roth IRA, or Backdoor Roth IRA.
Want to learn more? Read our related articles here.
