How to qualify for retirement savings tax breaks


Most workers can save in a 401(k) account at work regardless of how much they earn. But when it comes to saving in IRAs, you might not be eligible for the tax perks if your income exceeds a certain amount. There are also income limits to claim the saver's credit. Here's a look at the retirement tax breaks you might qualify for, depending on your 2017 income.

[Read: How Saving in an IRA Can Reduce Your 2016 Tax Bill.]

Roth IRA: Less than $133,000 for individuals and $196,000 for couples. The after-tax dollars you contribute to a Roth IRA grow without being taxed, and withdrawals after age 59 1/2 from an account at least five years old could be tax-free. Savvy investors might never have to pay income tax on any of the investment growth in their Roth IRA. "It's nice down the road when you are not working and your cash flow may not be as great," says MaryAnn Monforte, a professor of accounting at Syracuse University's Whitman School of Management. "You will have this money that comes back to you tax-free."

Workers are eligible to make Roth IRA contributions until their modified adjusted gross income exceeds $133,000 for individuals and $196,000 for couples. Most workers can contribute up to $5,500 to a Roth IRA in 2016, or $6,500 if they are age 50 or older. However, the amount you are eligible to contribute is phased out for individuals earning more than $118,000 as individuals or $186,000 as part of a married couple. "The income before a single taxpayer even touches the phaseout range is much higher for the Roth IRA," says Gil Charney, director of The Tax Institute at H&R Block. "A single taxpayer whose income is $90,000 is totally phased out of the traditional IRA, but he hasn't even touched the phaseout range of the Roth IRA."

Get all the help you need this tax season:

Take care to adhere to the income and contribution limits when making Roth IRA deposits. If you contribute too much to a Roth IRA, a 6 percent excise tax is applied to the excess contributions. However, if you withdraw the excess contributions before the due date of your tax return, you can avoid the penalty. "People who are near the top of the phaseout range may want to consider waiting until after they see what their tax situation is in January or February, and if they have room, they can make the contribution to their Roth IRA any time before April 18, 2017," Charney says. "That way, they are not making an excess contribution."

[See: 10 Tips to Boost Your IRA Balance.]

Traditional IRA: Less than $72,000 for individuals and $119,000 for couples. A traditional IRA allows you to defer paying income tax on the amount you contribute until it is withdrawn from the account. For example, a worker in the 25 percent tax bracket who contributes $5,500 to a traditional IRA could reduce his current tax bill by $1,375. And since the IRA contribution deadline is in April, you can make a deposit shortly before filing your taxes and claim a deduction on your current tax return.

Workers who don't have access to a retirement account at work are eligible to save in a traditional IRA regardless of their income level. "If you are covered by a 401(k), you might still be able to contribute to an IRA, but you have to look at the income limits," says Lisa Greene-Lewis, a certified public accountant at TurboTax and a former U.S. News contributor. Employees with 401(k)s might not be eligible to claim a tax deduction for their IRA contributions if they earn too much. While many workers can defer paying income tax on up to $5,500 that they contribute to a traditional IRA, or $6,500 at age 50 or older, the tax deduction is gradually phased out for those with a modified adjusted gross income between $62,000 and $72,000 as an individual and $99,000 to $119,000 as a member of a married couple. "There are higher limits when your spouse has a plan and you don't," Monforte says. If only one member of the married couple has access to a 401(k) at work, the tax deduction is phased out for the other spouse if the couple's income is between $186,000 and $196,000.

[Read: 5 New 401(k) and IRA Rules for 2017.]

Saver's credit: Less than $31,000 for individuals and $62,000 for couples. Low- and moderate-income workers who save for retirement in a 401(k) or IRA might be eligible for the saver's credit. Retirement savers with an adjusted gross income below $31,000 as an individual or $62,000 as a couple could qualify for a tax credit worth between 10 and 50 percent of the retirement account contribution up to $2,000 for an individual or $4,000 for a married couple. The biggest tax credits go to the retirement savers with the lowest income. "If you contribute to an IRA and your income is not above the phaseout for the saver's credit, you could qualify for the credit on top of the IRA contribution deduction," Charney says. "There's a triple benefit there: The first benefit is you are saving something for retirement, the second is you are getting a tax break from the reduction in income, and the third benefit is the credit itself."

Emily Brandon is the author of "Pensionless: The 10-Step Solution for a Stress-Free Retirement."


10 Tax Breaks for People Over 50

Copyright 2016 U.S. News & World Report


Advertisement