While the door has closed on many tax moves for 2015, several opportunities are still available for the savvy planner.
Traditional IRA– You can contribute up to $5,500 to a Traditional IRA (and so can a non-working spouse!). If you were age 50 or older last year, you can add an additional ‘catch-up’ contribution of $1,000 for a total of $6,500. Your ability to deduct contributions is ‘phased-out’ if you or your spouse is covered by a retirement plan at work (see below). Deadline for making a 2015 contribution is April 18, 2016.
- If neither you nor your spouse is covered by a plan at work: fully deductible
- If you are covered by a plan at work: for joint filers, your contribution is fully deductible if your modified adjusted income (MAGI) is below $98,000 ($61,000 for single filers) and phased out between $98,000 – $118,000 ($116,000 – $131,000 for single filers).
- If you are not covered by a plan at work, but your spouse is and you are joint filers: your contribution is fully deductible if your MAGI is below $183,000, and phased out between $183,000 – $193,000.
Roth IRA– Same contribution amounts apply as for the Traditional IRA. With a Roth IRA, you don’t get a tax deduction but your money grows tax deferred and withdrawals at retirement are tax free. Note: The income phase-out for contributing for a Roth is MAGI between $183,000 and $193,000 for joint filers ($116,000 to $131,000 for single filers).
Roth Conversion Two-Step Strategy. If you are ineligible to make current contributions to either a deductible Traditional IRA or a Roth IRA because you fail the income test (i.e., you make too much money!), there’s still a way to get money into a Roth IRA. I call it the Roth Conversion Two-Step Strategy because it requires that you complete a two-step process. First, you contribute to a nondeductible traditional IRA (there are no income test qualifications), then you immediately “convert” to a Roth IRA. This is a little loophole in the tax law, so take advantage of it while you can! Remember, a nonworking spouse can also use this strategy.
Caution: If you have other IRAs with tax deferred money in them, then a Roth conversion must be done on a ‘pro-rata’ basis…meaning you’ll owe some taxes on your Traditional IRA even though you left it untouched. To avoid this, see if your company 401k plan will allow you to ‘roll-up’ your Traditional IRA into the plan. Once this has been done, you can follow this Roth Conversion Strategy while avoiding income taxes. Timing really matters here, so be sure to consult your tax advisor before implementing any of the above strategies.
Self-employed business owners
If you own your own business, you can still take advantage of tax deductible contributions to a Simplified Employee Pension Plan (SEP). With a SEP, you can contribute 25% of your income to a maximum of $53,000. Your deadline for contributions are April 18th or the filing of any extensions (October 15, 2016 is final extension date). If you have employees, you must contribute the same percentage for them as you do for yourself. Note: As a self-employed owner, your calculation is a bit more complicated than simply taking 25% and you may need help from your tax professional.
Assuming you established these plans last year, you have until your tax filing date (including extensions) to contribute to:
- SIMPLE IRA– You can contribute up to 100% of your pay up to $12,500 (plus an additional $3,000 if you were age 50 or older in 2015). You must also contribute for certain eligible employees. Note: To take advantage of a SIMPLE IRA, you must have established the plan no later than Oct 1, 2015.
- Solo 401k plan– contributions come in two forms: elective deferrals and non-elective contributions. With elective deferrals you can contribute 100% of compensation up to $18,000 ($24,000 if you were age 50 or older in 2015). For non-elective contributions, you can contribute 25% of compensation but the combination of elective deferrals and non-elective contributions cannot exceed $53,000 ($59,000 is age 50 or older in 2015). You have until your tax filing date (including extensions) to make your contributions.
Tick-Tock! Keep an eye on the deadlines for increasing your 2015 tax refund.