By Denise Appleby, Appleby, CISP, CRC, CRPS, CRSP, APA
Funding your IRA on a regular basis can go a long way towards helping to ensure that you enjoy a financially secured retirement. However, your contributions can be all for naught if you do not meet the eligibility requirements for the contributions that you make. This is because ineligible contributions create ‘excess contributions’, which can be subject to double taxation and excise tax if not corrected timely. The following are some general guides for ensuring that your contributions meet the eligibility requirements.
Make Sure You Have Eligible Compensation
You must have eligible compensation in order to make a contribution to a Traditional IRA or Roth IRA. Eligible compensation includes W-2 Wages, commissions, professional fees, bonuses and self-employment income. If you are receiving taxable alimony and separate maintenance payments under a decree of divorce or separate maintenance, that amount may also be used as compensation for purposes of making a contribution to your IRA.
If you are married and file a joint federal tax return with your spouse, your spouse’s income can be used for this purpose, if you do not receive eligible compensation of your own.
The maximum amount that you can contribute to your IRA is the lesser of 100 percent of your eligible compensation received for the year, and the dollar limit in effect for the year. Click here for the contribution limits, which is determined by whether you will be at least age 50 by the end of the year.
This amount can be contributed to either your Traditional IRA or Roth IRA if eligible, or it can be split between both types of IRAs.
You can make a Traditional IRA or a Roth IRA contribution only if you are eligible to do so. For this purpose, there are two eligibility requirements that apply, in addition to having eligible compensation.
There are no age limitations on when contributions can be made to Roth IRAs. However, contributions cannot be made to your Traditional IRA for the year that you reach age 70½ and for any year after that.
There are no income limitations for making contributions to Traditional IRAs. However, you are not eligible to make a contribution to a Roth IRA is your modified adjusted gross income exceeds certain amounts. Please click here for these amounts.
Your IRA contribution must be made by your tax filing due date, which is April 15 if you file on a calendar year. No extensions apply. Your contribution must be delivered to your IRA custodian by this deadline if hand-delivered or if the instructions are provided via fax. Some financial institutions will accept instructions via fax to move funds from a non-IRA to an IRA. If the contribution is delivered via mail, it must be mailed by this deadline. If mailed, you must use an IRS approved mailing service in order to satisfy the postmark requirement. This is important in the event your financial institution receives your contribution after April 15, if the contribution is for last year. In addition to the United States post office, a Designated Private Delivery Service can be used. ( The deadline is extended to the next business day is April 15 falls on a weekend of legal holiday. For 2015 contributions, the deadline is April 18, 2016))
If your IRA contributions do not meet this deadline requirement, your IRA custodian is required to report it for the year in which they receive the amount, even if you want it to be applied to the previous year.
Deductions and The Saver’s Tax Credit
If eligible, you may claim a deduction for contributions made to your Traditional IRA. You are eligible to deduct your IRA contribution if you are not covered under an employer sponsored retirement plan, or married to someone who is (covered under an employer sponsored retirement plan). If you and/or your spouse are covered under an employer sponsored retirement plan, your eligibility to deduct a contribution to your Traditional IRA depends on your modified adjusted gross income (MAGI). Click here for the rules on deducting your Traditional IRA contribution
If you are eligible, you can receive a nonrefundable savers tax credit of up to $1,000 for contributions made to your IRA and other retirement savings account.
Start Early and Contribute Often
The earlier you start to fund your retirement nest egg, the more likely you are to have enough to guarantee a financially retirement. Consider that if you need to save $200,000 you would need to save about $6,500 per year for 20 years- assuming a conservative rate of return of 4 percent. But, if you have only 10 years, you would need to save about $16,000 per year. The earlier you start, the more manageable your savings.