It will soon be April 15, the deadline for filing your tax return — and the last day you can make a contribution to your individual retirement account for the prior tax year (2018), whether or not you’ve filed your 2018 tax return.
As a proponent of financial literacy and retirement savings, I’m a big fan of IRAs for people of all financial means, so I encourage you to fund your IRA. However, only 1 of 3 U.S. households owns IRAs, according to the Investment Company Institute. That’s hardly enough, and yet it couldn’t be easier to take advantage of this savings vehicle.
If you don’t have an IRA because you can’t afford to, consider this: You may be able to take advantage of the “Retirement Savings Contributions Credit” (“Saver’s Credit” for short). This reduces your taxes dollar for dollar. If you have a tax bill of $1,000 and apply for a credit of $1,000, you pay zero taxes. There is more involved, but it is not complicated.
You’ll want to read Form 8880 on the IRS website to figure out whether you qualify and to calculate the amount of the credit. For instance, you will not qualify if your “modified adjusted gross income” (the amount on Form 1040, line 7) is more than $31,500 ($47,250 if head of household; $63,000 if married filing jointly).
You’ll find more information on the Saver’s Credit on Page 46 of the 2018 Publication 590-A, which you can find online at irs.gov.
The opportunity that presents itself at the moment is to fund last year’s permitted contribution if you haven’t already done so. The maximum permitted for 2018 is the smaller of 1) $5,500 or 2) your taxable compensation for 2018. Another limit applies if you were age 50 by the end of 2018; then you can contribute the smaller of 1) $6,500 or 2) your taxable compensation for 2018. For example, if you are age 20 and you made $3,000 working part time in 2018, the maximum 2018 contribution you can make is $3,000. If you are age 55 and you earned $50,000, the maximum for you is $6,500 for 2018.
You also can contribute for 2019 now. The caps are higher: The maximum is $6,000, or $7,000 if you’re age 50 or older by the end of 2019.
No matter the year in question, you cannot contribute to a traditional IRA if you are age 70 1/2 at the end of the tax year. For example, if you turned 70 in the first six months of 2018, you cannot contribute to a traditional IRA in 2018 or thereafter. Traditional IRAs are tax-deferred.
However, you can contribute to a Roth IRA if you have earnings (there is a limit on earnings), even if you are over age 70 1/2. Roth IRAs are tax-free, not tax-deferred, assuming certain conditions are met (read about “qualified distributions” at https://bit.ly/2uWeI12).
Since time is tight for a 2018 contribution, you’ll need to confirm the mechanics of funding the contribution with your IRA custodian. If you already have an IRA, ask your custodian for advice.
If you do not already have an IRA with a financial institution, you can talk with your bank or do some online research to “open an IRA.” Your research might take you to Fidelity (fidelity.com) or Vanguard (vanguard.com), among others. Their websites are rich with information and helpful resources. (I’m not connected with either institution.)
These custodial websites also provide detailed information about who can contribute to a traditional or Roth IRA, how much you can contribute, and whether you qualify for a tax deduction. If you really want to understand details, download the IRA account application.
If you are not one of the households that have IRAs, you may be investing for retirement through your retirement plan at work. According to the ICI, 29 percent of U.S. households have such retirement plans, but no IRAs. That brings the total count of retirement plan coverage to 79 million households, or 62 percent of all U.S. households. If you are not taking part, take this opportunity to start now.
If you qualify for a Saver’s Credit, the government (other taxpayers) is supporting your cause to save and invest for retirement. Take advantage.
On another note, if you enjoy reading this column, tell me why by emailing me at email@example.com. If you are one of the first 100 to reply, I’ll send you a copy of “Managing Retirement Wealth; An Expert Guide to Personal Portfolio Management in Good Times and Bad,” my award-winning book originally published in 2011 and updated in 2017.