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The deadline to contribute to Roth IRAs for the 2016 tax year is April 17, 2017. (Usually it’s April 15, but in 2017 that date falls on a Saturday.) But your clients can contribute to their Roth IRAs for the 2017 tax year now. The sooner the contribution is made, the sooner any future investment earnings will be sheltered from taxation.
The IRS says that for the 2017 tax year, married couples filing jointly can make full Roth IRA contributions if their adjusted gross income (AGI) is $186,000 ($118,000 for single filers). Allowable contributions are reduced if the clients’ income exceeds those amounts until they are prohibited completely once married couples’ AGI reaches $196,000 ($133,000 for singles).
Some clients might be hesitant to contribute to a Roth IRA for 2017 before the end of the year because they’re concerned their income for that year may eventually exceed the eligibility limits. If they do end up making too much after contributing, it’s possible to avoid any penalty on the excess contribution if they remove the amount (and any associated earnings) before filing that year’s tax returns.
Although the maximum deposit amount for Roth IRAs hasn’t changed for the 2017 tax year (the lesser of the client’s earnings, or $5,500), some clients may still be able to contribute more now than before. That’s because clients who turn 50 in a particular calendar year can contribute an extra $1,000 to a Roth IRA for that tax year, and their spouses who are that age or older can deposit the higher amount as well.
Husbands and wives without any earnings can still make contributions to Roth IRAs, as long as their respective partners are eligible to make a deposit. The total amount contributed for the couple can’t exceed the lesser of $5,500 each ($6,500 each if both members of the couple are 50 or older), or the working partner’s earnings. So if a husband is retired, but his wife earns, say, $15,000 in a year, they could each contribute the maximum amount allowed per person. But if she only made $6,000, then that’s the most they could contribute between the two of them (while still adhering to the per-person limits).
Some clients may be concerned about making contributions to a Roth IRA because they think they might need that money for an unexpected emergency. They shouldn’t worry about that, since Roth IRA owners can withdraw their contributions at any time for any reason with no taxes or penalties whatsoever. And the good people at the IRS let Roth IRA owners designate any withdrawals as “contributions” until the amount of money pulled out matches the total of the deposits.
Another little-known reason to start contributing to Roth IRAs as soon as possible is the “five-year rule” that pertains to tax-free withdrawals. Under this provision, a Roth IRA owner generally can’t withdraw earnings from the account without taxes until at least five years have transpired from the beginning of the tax year for which they made their first Roth IRA contribution, even if they are over 59½ when making the withdrawal.
Again, they can still withdraw the contribution portion of the account first whenever they want, and that part will be free from taxes and penalties. But if they then pull out the earnings before the five-year time period has elapsed, they could be taxed and penalized on that amount.
Roth IRA contributions aren’t tax-deductible, but certain low-income workers can get an extra bonus from the IRS for setting aside some funds in the accounts (or any other qualifying retirement account). The Saver’s Credit could provide anywhere from 10 to 50 percent of the amount the clients deposit into the Roth IRA, up to $2,000 per person per year. The credit will either reduce the amount that the client will owe, or increase their tax refund.
For the 2016 tax year the credit begins to get phased out for married couples filing jointly with $37,000 of adjusted gross income ($27,750 for head of household filers and $18,500 for all others). It is phased out completely at $61,500, $46,125 and $30,750, respectively.
Your clients can open Roth IRAs for their minor children, as well, as long as the children have legitimate earned income (like babysitting, lawn mowing and burger flipping). The accounts are usually established as custodial accounts, with the parent overseeing the account until the child reaches the legal definition of adulthood—usually at age 18 or 21, depending on the state.
Best of all, the kids don’t even have to set aside their hard-earned money. Their parents (or anybody else) can fund the account, and the minors can spend their earnings as they wish. But any money contributed to the kid’s Roth IRA by someone else is considered a gift, and is technically the recipient’s to use as they please once they reach adulthood.
Clients of any age can contribute to a Roth IRA, as long as they or their spouses have the earnings needed to make the contribution, yet not so much that it exceeds the income limit for eligibility. But a good portion of your clients are likely nearing the end of their working years, and therefore won’t have many more opportunities to contribute to Roth IRAs. Ironically, the more they save to their Roth IRAs, the fewer working years they may have left.
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