If you haven't made your 2015 IRA contribution, now is the time. And don't forget that young children who mow lawns, baby-sit or do other odd jobs also can benefit from contributing to their IRAs.
Let's go through some basic questions, but before taking any action, be sure to check with your tax adviser.
What is an IRA?
IRA stands for an "individual retirement arrangement," but most people call IRAs "individual retirement accounts." Here is the IRS definition from Publication 590-A: An IRA is "a personal savings plan that gives you tax advantages for setting aside money for retirement."
IRA rules seem to change a lot. What's the best way to stay informed?
Log onto www.irs.gov, the official Internal Revenue Service website, for the latest news on IRAs.
Your best resource is Publication 590, which was recently split into two parts: 590-A ("Contributions to Individual Retirement Arrangements") covers contributions, and 590-B ("Distributions From Individual Retirement Arrangements") deals with withdrawals ("distributions"). If you want printed publications mailed to you, call the IRS at 800-TAX-FORM (800-829-3676).
When looking at Publications 590-A and 590-B, always start with "What's New" for the year. For 2015, a very important change is a new limitation on rollovers. (Starting in 2015, no matter how many IRAs you have, you are limited to making only one rollover in any one-year period from any particular IRA. However, you can still make "unlimited trustee-to-trustee transfers between IRAs" because they are not considered rollovers.)
What's the last day you can fund your 2015 IRA?
This year, the deadline for filing your return is Monday, April 18, not April 15, so April 18, 2016, is the last day you can make your 2015 contribution to your IRA.
Be sure to advise your IRA custodian that the contribution is for the 2015 tax year. You can make your 2016 contribution at the same time, but make sure your custodian records the second contribution for 2016.
If you file for a tax-return extension, can you fund your 2015 IRA after April 18, 2016?
No. You must make the 2015 contribution by April 18, 2016.
Can you file your tax return before making an IRA contribution?
Yes. But be sure you make your 2015 contribution before April 18, 2016.
What is the maximum you can contribute to an IRA for the 2015 tax year?
Whether you contribute to a Roth, which is tax-free, or a traditional IRA, which is tax-deferred, the maximum you can contribute for 2015 is $5,500 ($6,500 if you turned 50 or older in 2015). (This also is the 2016 limit.) If you earn less than $5,500 (or $6,500 if you are 50 or older), the maximum is limited to how much you earn. For example, a 16-year-old who earned $1,000 doing odd jobs in 2015 can set up a 2015 IRA and fund it with $1,000 (or less, but not more).
Can you make a $5,500 contribution to a traditional IRA and another $5,500 contribution to a Roth IRA?
No. But you can contribute to both, if you qualify, as long as the combination is not more than the limits we discussed above.
For example, a 16-year-old who earned $1,000 in 2015 can contribute $500 to a Roth and $500 to a traditional IRA — however, at his age, it would be wiser to contribute the full $1,000 to a Roth to enjoy tax-free growth.
Julie Jason, JD, LLM is a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author.
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