IRA and Pension Opportunities
As an individual you can exclude the increase in the value of an investment when you make a contribution into a Roth IRA. The contribution amount is not deductible but the growth is never taxed. The earlier you begin investing in a Roth IRA the sooner you receive the benefit of tax-free growth. Your maximum contribution amount for 2016 is $5,500 and an additional $1,000 is permitted if you have reached age 50 or above during 2016. The contribution is based on your filing status and modified adjusted gross income. For 2016 a single taxpayer can have a modified adjusted gross income amount of $117,000 and below and be permitted to contribute the full amount of up to $5,500 and additional $1,000.
As the $117,000 amount increases the contribution amount is phased out allowing a partial contribution. When the modified adjusted gross income reaches $132,000 the ability to contribute to a Roth IRA is completely gone.
For a married couple filing a joint return the law allows a contribution for each spouse of $5,500 and $1,000 for the 50 or older contribution. The couple with a modified adjusted gross income of $184,000 and below can maximize the contribution and there is a phase-out as the modified adjusted gross income reaches $194,000.
If the dollar thresholds are an issue then the taxpayer can achieve the second goal in tax which is “deferral” of the tax into a future tax year when it may be more beneficial to pay the tax because the tax bracket may be lower or other transactions may be taking place which will allow better planning opportunities.
A contribution to a nondeductible IRA allows the growth in the investment to be “deferred” into the future tax period. In addition, opportunities can arise in the future when your income decreases and you fall into a lower bracket you could “convert” the nondeductible IRA into a Roth IRA and pay less tax in the year of conversion on the growth or perhaps no tax if your income has really dipped in a particular year or years. The conversion can be done in pieces and is not an all or nothing approach. The best part about a nondeductible contribution to an IRA is that your modified AGI is not a factor. So if you are in a 10% or 39.6% bracket and even already have an employer sponsored pension plan you can still make a contribution to the IRA and look to future
opportunities to save on taxes.
When you do start taking distributions on your IRA you will only have some of it taxed and some will be a tax-free return of your investment.
In addition, don’t forget about checking with your employer to see if you can contribute any more into your employer- sponsored 401(k) plan, 403(b) plan or 457(b) plan before the year ends.
These plans allow tax deferral and permit tax savings in the current year with the growth deferred into another period when distributions are received.
For issues and questions dealing with a Roth IRA, nondeductible IRA and employer sponsored plans give me a call for more details.