Financially, many of us associate April with taxes — but we should also associate April with important IRA deadlines.
• April 1 is the absolute deadline to take an initial IRA Required Mandatory Distribution (RMD).
• April 15 is the deadline for making annual contributions to a traditional or Roth IRA.1,2,7
Let’s discuss the contribution deadline first and then the deadline for that first RMD (which affects only those IRA owners who turned 70-and-a-half last year).
The earlier you make your annual IRA contribution, the better. You can make a yearly Roth or traditional IRA contribution any time between Jan. 1 of the current year and April 15 of the next year. For example, you can make your IRA contribution for 2014 any time from Jan. 1, 2014 to April 15, 2015. The IRA contribution window for 2013 is Jan. 1, 2013 to April 15, 2014.1
So you have more than 15 months to make your IRA contribution for a given year. But why wait? Savvy IRA owners pour new money into their accounts each January — as early as they can — to give those dollars more months to grow and compound. (After all, who wants less time to amass retirement savings?)
You cut your income tax bill by contributing to a deductible traditional IRA. That’s because you are funding it with after-tax dollars. To get the full tax deduction for a 2014 traditional IRA contribution, you have to meet one or more of these financial conditions:
• You aren’t eligible to participate in a workplace retirement plan.
• You are eligible to participate in a workplace retirement plan, but you are a single filer with adjusted gross income of $59,000 or less. (Or if you file jointly with your spouse, your combined AGI is $95,000 or less.)
• You aren’t eligible to participate in a workplace retirement plan, but your spouse is eligible, and your combined 2014 gross income is $178,000 or less.2,3
If you are the initial owner of a traditional IRA, by law you are required to stop making contributions to that IRA starting in the year you turn 70-and-a-half. If you are the initial owner of a Roth IRA, you can contribute to it as long as you live.4
If you are making a 2013 IRA contribution in early 2014, be aware of this fact: You must tell the investment company hosting the IRA account what year the contribution is for. If you fail to indicate the tax year that the contribution applies to, the custodian firm may make a default assumption that the contribution is for the current year (and note exactly that to the IRS).1
So, write “2014 IRA contribution” or “2013 IRA contribution” as applicable in the memo area of your check, plainly and simply. Should you make your contribution electronically, double-check that these details are communicated.
How much can you put into an IRA this year? You can contribute up to $5,500 to a Roth or traditional IRA for the 2014 tax year. If you have multiple IRAs, you can contribute up to a total of $5,500 across the various accounts. Should you contribute in excess of $5,500, you will not be rewarded for it: you have until the following April 15 to correct the contribution with the help of an IRS form, and if you don’t, the amount of the excess contribution will be taxed at 6 percent each year the correction is avoided.5
If you earn a lot of money, your maximum contribution to a Roth IRA may be reduced because of modified adjusted gross income phase-outs, as follows.6
2013 Tax Year • Single/head of household: $112,000-127,000
• Married couples: $178,000-188,000
2014 Tax Year
• Single/head of household: $114,000-129,000
• Married couples: $181,000-191,000
You can’t make a Roth IRA contribution if you are married filing separately with modified adjusted gross income of $10,000 or more and lived with your spouse in any part of a year.6
A last-chance Required Minimum Distribution (RMD) deadline rolls around on April 1. If you turned 70-and-a-half in 2013, the IRS gave you a choice: You could (a) take your first Required Minimum Distribution from your traditional IRA before Dec. 31, 2013, or (b) postpone it until as late as April 1, 2014.7
If you chose b, you will have to take two RMDs this year — one by April 1, 2014, and another by Dec. 31, 2014. (For subsequent years, your annual RMD deadline will be Dec. 31.) The investment firm hosting your IRA should have already notified you of this consequence, and the RMD amount(s) — in fact, they have probably calculated the RMD(s) for you.7
Original owners of Roth IRAs will never face this issue — they are not required to take RMDs.7
Todd Kockelman is a registered representative of Packerland Brokerage Services Inc. and may be reached at 651-204-0655 or Todd@K-FFinancial.com.