Beat the Buzzer for Taxes and IRA Contributions

Beat the Buzzer for Taxes and IRA Contributions

Each spring, the end of March means the clock is ticking and it’s time to check your bracket—your tax bracket. Why the rush? The tax filing deadline, which is April 18 this year, is quickly approaching and, with it, the cutoff for 2016 Individual Retirement Account (IRA) contributions.

If you haven’t filed your 2016 taxes, you’re not alone. According to the IRS, 5.7 million fewer individual taxpayers hadn’t filed their returns as of early March, when compared to 2016. You still have time to get your taxes in order; review the tax form details at the bottom of this post for help.

Whether you’ve prepared and filed your taxes or not, don’t miss your shot at contributing to an IRA for the 2016 tax year. While IRAs allow you to make previous year contributions until tax day, making contributions earlier means more time in the market and for your dollars to potentially grow.

No Overtime for IRA Contributions

Unlike extensions for tax filings, the IRS does not permit extensions for IRA contributions. Once the deadline has passed, you’ve missed the opportunity for that tax year. The deadline to make your 2016 contribution is April 18.

Currently, you’re allowed to invest up to $5,500 into an IRA each year. You could invest that same amount into a taxable account, but it would not have the same tax benefits an IRA offers. In fact, because investors may have missed out on those benefits in the past, the IRS created “catch-up” contributions for those age 50 or older. This provision allows them to contribute an additional $1,000 annually.

Roth vs. Traditional IRAs: A Head-to-Head Comparison

Review the features of both IRA types to determine which one might be suitable for you.

Roth IRAs   Traditional IRAs
  • You must have earned income below the annual limits to be eligible.
  • You may be partially eligible if your income is within the annual phase-out range.

 

Income Considerations
  • You must have earned income.
  • Contributions are not tax deductible. However, your modified adjusted gross income must be under the annual limits.
  • Earnings are tax-free provided the account is at least five years old and you are at least age 59 ½.
Taxability of Contributions and Earnings
  • Some or all contributions may be tax deductible, depending on your modified adjusted gross income, tax-filing status and if you or your spouse participated in a workplace plan.
  • Income tax on earnings deferred until you withdraw them.1
  • At age 59 ½, you can make penalty-free withdrawals.
  • You are not required to take money out at any age. Plus, you can contribute as long as you have earned income.
Distribution Considerations
  • At age 59 ½, you can make penalty-free withdrawals.
  • In the year you turn age 70 ½, you can no longer make contributions. Plus, you must take minimum distributions annually. Otherwise, a 50% penalty applies to the amount not withdrawn.

 

Income Out of Bounds for a Roth IRA?
Consider a Conversion

If your income limits exclude you from qualifying for a Roth IRA, you may still consider a Roth Conversion IRA. Regardless of your income limits, you may convert all or part of your Traditional IRA to a Roth IRA without being subject to the 10% early withdrawal penalty. You will owe taxes in the year you convert on any contributions and earnings not previously taxed.

Find Your Tax Forms and Fund Information

If your accounts at American Century Investments generated a 2016 Form 1099, we mailed them to you in January. You can easily download copies of your forms by logging into your My Account Page. Visit our Tax Center to find additional reporting information, such as fund-specific exemptions, help understanding and calculating cost basis.

Let Us Give You an Assist

If the rush toward the IRA deadline is causing you madness, turn to us for help. Visit our IRA Center for additional information or contact us today. Or, if you’re ready, make your 2016 contribution now.

1Earnings and deductible contributions will be taxed as ordinary income when you withdraw them.

Roth IRA: Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.

IRA: IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for withdrawal prior to reaching age 59 ½.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.