How to Save Your Tax Refunds for Your Retirement
If you’re expecting a tax refund this year, consider saving at least a portion of it for retirement. Depositing your tax refund in an individual retirement account could make you eligible to claim a tax deduction on your current or a future tax return. You won’t have to pay tax on your IRA contribution until you withdraw the money from the account. Here’s how to save your tax refunds for your retirement:
Specify which year the contribution should be applied to. If you contribute to a traditional IRA between Jan. 1 and April 18, you can choose whether the contribution will apply to tax year 2016 or 2017. If you don’t tell the plan administrator which year to use, the contribution might be automatically applied to the calendar year when it was received. IRA contributions that will qualify you for a tax deduction on your 2016 tax return are due by April 18, 2017. Deposits received after that date will be automatically applied to tax year 2017.
You can claim an IRA deduction before the money is in the account. You can file a tax return claiming a tax deduction for a traditional IRA contribution before making the deposit. You don’t need to make the IRA deposit until the due date for your tax return. However, if the deposit isn’t initiated by your tax filing deadline, you will need to file an amended 2016 tax return without the IRA deduction and pay any additional tax you owe.
Pay attention to the contribution limits. You may be eligible to contribute up to $5,500 to a traditional IRA, Roth IRA or myRA in 2017. The contribution limit jumps to $6,500 for those age 50 and older. But the ability to make Roth IRA contributions is phased out for people whose modified adjusted gross income is between $118,000 and $133,000 as an individual or $186,000 to $196,000 for married couples. If you deposit too much in a Roth IRA, a 6 percent excise tax is applied to the excess contributions. If you have a 401(k) or similar type of retirement benefit at work, traditional IRA eligibility phases out when your modified adjusted gross income is between $62,000 and $72,000 ($99,000 to $119,000 for couples).
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