2007 may be gone, but it isn’t too late to make 2007 IRA contributions. Unlike most tax tips that require action to be taken before December 31st, IRAs have an added benefit of being able to make prior year contributions up until April 15th. This is good news if you want to take advantage of the many tax benefits that these accounts provide.
Eligibility Requirements
Anyone with earned income is eligible to contribute to a traditional IRA, but there are some restrictions as to who can deduct the contributions. There are income limits that are used to determine how much of the contributions are deductible, if any at all.
If you are currently covered by a retirement plan at work in 2007, deductibility for traditional IRA contributions are phased out if your modified adjusted gross income is:
- More than $83,000 but less than $103,000 if married and filing a joint return
- More than $52,000 but less than $62,000 for a single individual or head of household
- Less than $10,000 for a married individual filing a separate return
If you live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work but you are not, the deduction is phased out if your modified adjusted gross income is more than $156,000 but less than $166,000.
Tax Benefits
Traditional IRA contributions are made on a pre-tax basis, which means each dollar you contribute to an IRA is deducted from your taxable income. This is great news if you have calculated your taxes and find that you may owe the IRS money. Making contributions into an IRA could reduce your tax burden. Even if you’re expecting a refund, this is great news. Additional deductions will mean a larger refund.
Contribution Limits
For 2007, the maximum contribution you can make to an IRA is $4,000. If you are age 50 or older, you are granted an additional $1,000 for a total of $5,000 for the year. If you are married and both eligible for fully deductible contributions, this could mean the ability to deduct up to $8,000, or $10,000 if age 50 or older, from your income. If you’re already thinking about making contributions for 2008, the good news is that the limit is raised to $5,000 with an additional $1,000 for those 50 and older.
Roth IRAs
You are still eligible to make contributions to Roth IRAs up until April 15th as well, but keep in mind that Roth contributions are made with after-tax money. This means that you won’t be able to deduct those contributions from your 2007 taxable income. Even so, this is a great way to save for retirement, especially since the earnings in a Roth IRA are tax free.
Send Your Tax Refund Straight to Your IRA
The IRS has recently made changes to how you can receive your tax refund, and one of those changes allows you to have them directly deposit the refund into your IRA. Not only that, but if you expect to receive the refund prior to April 15th, you could even elect to make that a 2007 contribution.
Keep in mind that the IRS is only responsible for sending your refund to your financial institution. It is up to you to instruct the IRA provider as to what year to make the contribution, and then where to invest the money. Also, if you had figured your taxes based on using the refund for a 2007 contribution, you’ll want to file well before the April 15th deadline so that your direct deposit makes it to your IRA before the deadline, otherwise it would be a 2008 contribution and require you to file an amended return.
