An IRA Qualified Contribution Can Help You Retire Rich

By Dan Caplinger Markets Fool.com

Saving for retirement is a must-do for workers today, and opening and contributing to an IRA can be the best way to save. These retirement accounts offer tax benefits, some of which depend on whether you choose a traditional or a Roth IRA. To make sure your contribution will qualify for these tax breaks, you should know the maximum annual contribution limits and how they relate to your salary or other earned income. There are also other rules that govern IRAs that you should know as well. Below, we'll take a closer look at IRA qualified contributions and how you can use them to help you enjoy a financially secure retirement.

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Limits on all IRA qualified contributions

Certain rules apply to all IRAs, regardless of which type you use. There's a maximum contribution amount that you can make to IRAs each year. For 2016 and 2017, that amount is $5,500 for taxpayers who are younger than age 50. For those who are 50 or older, an additional catch-up contribution is available, bringing the total maximum up to $6,500.

These amounts go up periodically based on inflation. However, with rates of inflation having been low lately, the amount hasn't risen since 2013.

Income limits that reduce or eliminate qualified Roth IRA contributions

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Taxpayers with incomes above certain limits can't make Roth IRA contributions. A phase-out range exists below the absolute upper limit, in which only a portion of the annual maximum contribution is available for Roth IRA contributions. The chart below gives the details by filing status.

Filing Status

2016 Tax Year

2017 Tax Year

Single

$117,000-$132,000

$118,000-$133,000

Married Filing Jointly

$184,000-$194,000

$186,000-$196,000

Married Filing Separately

$0-$10,000

$0-$10,000

Data source: IRS.

Say that you're single and looking to make a 2016 Roth IRA contribution. If your adjusted gross income is more than $132,000, then you can't make any Roth contribution. If your AGI is below $117,000, you can make a full contribution. In between, you'll be able to make a partial contribution. For instance, if your income is halfway between the low and high end of the range, then you'll be able to make a 50% Roth IRA contribution of $2,750 for those under 50 or $3,250 for those 50 or older.

Income limits that make traditional IRA contributions non-deductible

Unlike Roth IRAs, you can always contribute to traditional IRAs. However, in some cases, those contributions won't qualify for a tax deduction.

The details depend on how much money you make and whether you're covered by a 401(k) or similar employer retirement plan at work. If neither you nor your spouse is covered by an employer plan, then you can always deduct the full amount. However, if you do have plan coverage at work, then the income limits below govern whether you can deduct your contribution:

Filing Status

2016 Tax Year

2017 Tax Year

Single or Head of Household

$61,000-$71,000

$62,000-$72,000

Married Filing Jointly

$98,000-$118,000

$99,000-$119,000

Married Filing Separately

$0-$10,000

$0-$10,000

Data source: IRS.

Meanwhile, if you're not covered but your spouse is, then higher income limits apply as follows:

Filing Status

2016 Tax Year

2017 Tax Year

Married Filing Jointly

$184,000-$194,000

$186,000-$196,000

Married Filing Separately

$0-$10,000

$0-$10,000

Data source: IRS.

Again, the upper end of the range indicates where no deduction is allowed. Between the lower and upper end of the range, a prorated deduction is allowed. Below the low end of the range, you can deduct the full amount of any qualified contribution you make.

Don't wait to make your IRA qualified contribution

Those who are looking to use an IRA have until the tax filing deadline for the tax year in which they want to make a qualified contribution. For the 2016 tax year, that means you have until April 18, 2017, to contribute to an IRA.

IRAs are great tools to use in saving for retirement. By knowing how to make an IRA qualified contribution, you can ensure that you'll get all the benefits available to retirement savers who use these tax-favored retirement accounts for their financial planning. That will help you retire richer and with more confidence in your financial picture.

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