Recently, the last date for funding an IRA or individual retirement account was announced for the tax year 2017. Despite being quite an effective strategy for tax-saving, nearly 75 percent of the Americans think that funding their IRAs after the tax year has ended is an illegal move.
An IRA that is opened after the end of a tax year can reduce taxable income, which in turn saves money for those who are contributing towards their IRAs.
When an individual contributes the maximum amount, set by the tax codes towards his or her IRA, the money contributed towards the IRA is deducted from the taxable income and this, in turn, reduces the tax bill. According to the tax codes, however, a Roth IRA is not eligible for such deductions.
Roth IRAs do not allow for tax savings while an individual is still contributing. For Roth IRAs, however, withdrawals made after retirement are completely tax-free.
Specifications regarding funding the individual retirement accounts for tax deductions
There are certain specifications when it comes to tax deductions. For instance, a married couple with no employer-sponsored retirement plans can make contributions up to $5,500 towards IRA and the amount will be tax deductible. On the other hand, for couples who have signed up for company-sponsored retirement plans, the maximum deductible amount varies according to income.
In addition, for any individual to be eligible for this tax deduction, he or she must have the required earned income. An individual aged 50 and above can contribute up to $5,500 or $6,500 a year.
For an individual contributing to both a traditional IRA and a Roth IRA, the maximum deductible amount is calculated by taking into account both the IRAs.
It is also important to specify the tax year for which the contribution is being made. For instance, if the contribution is being made for the tax year 2017, then it should be specified as such.
Besides the last date for funding IRAs, the tax deadline for the tax year 2017 had also been announced. This is the time to file individual tax returns. An automatic extension can be requested before the deadline. The automatic extension gives an additional six months for individuals to file their tax returns.
On receiving an extension, anyone who wishes to fund a solo 401(k) is given time until October 15 to complete the same.