When is the best time to open an IRA account?
I had a 403(b), but contributions stopped when I changed jobs. Can I open an IRA account with funds from my ordinary savings account before the April tax return deadline and claim a tax credit?
It’s always a good time to save more for retirement. Yes, so long as you have earned income during the year, you may make contributions to an Individual Retirement Account – IRA, it doesn’t matter that the funds are coming from a savings account.
Most people that contribute to an IRA receive a tax deduction for the year in which they make the contribution. You’ll want to review this information from the IRS to determine your eligibility to deduct IRA contributions.
You are also correct that you can make IRA contributions for the previous tax year up until the IRS tax filing deadline, typically April 15th of the next year. Make sure to let the financial institution know that your intention is for the contribution to count for the previous tax year.
Yes, you can contribute to an IRA before April 15th for last year and still make a contribution for this year. Limits are $5,500 + $1,000 catchup for a total of $6,500 possible. And you can do both a 403(b) and an IRA, but they each have different limits. For both a 403(b) and an IRA, you need to have earned income, not dividends or passive income, up to the contribution amounts.
You can fund your IRA with savings funds or a bank account as long as you had the earned income up to the contribution amount. This can be a little tricky so you might want to discuss with a CPA.
Good luck, Dan Stewart CFA®
From a timing standpoint, you have until tax day (April 15, 2017) to make a contribution and have it count for the 2016 tax year. As far as the 'best' time, I suggest making monthly contributions throughout the year so that you get the average of the market over that year, rather than one contribution which only takes one day into account. This is referred to as 'dollar cost averaging'.
For 2016, the maximum contribution for both Roth and traditional IRA accounts is $5,500, with a catch up provision that allows an additional $1,000 if you turned 50 or older during 2016.
Contributions can come from your bank account, unlike 401(k) or 403(b) contributions that come out as payroll deductions, so long as you have at least that much income for the year you are contributing. In other words, if you had $4,000 of income in 2016, you could contribute a maximum of $4,000 into a Traditional or Roth IRA, because you are not allowed to contribute more than your earned income, even though the annual limit is $5,500.
There are also income limits that may affect if you can contribute, and if so, whether it is deductible or not.
For a Traditional IRA, you also have to take into account whether you are eligible to participate in an employer sponsored plan. I'll assume for this conversation that you have a new employer, and that you were not yet eligible to participate in 2016. Income in these answers refers to your 'Modified AGI' - the number you will find at the bottom of the front page of your 1040.
- If you are not eligible to participate in an employer plan, your entire contribution is deductible, so long as your income (MAGI) makes you eligible to contribute.
- If you are filing as single or head of household, you start to phase out eligibility between $61,000 and $71,000 of income.
- Married filing jointly phases out between $98,000 and $118,000 of income.
- Married filing separately phases out completely at $10,000 of income.
- If one spouse in a married couple is covered by a plan, but the other isn't, the phaseout occurs between $184,000 and $194,000 of income.
- You can make contributions if your income is over those limits, but they will not be tax deductible - they will be after tax contributions. In many cases, you are better off making a Roth IRA contribution instead because the growth on a Roth IRA has the ability to be withdrawn tax-free so long as you follow the IRA guidelines.
For a Roth IRA, the contributions are never tax deductible, but withdrawals can come out tax free.