Fund a Traditional IRA for 2017 Before the April 2018 Filing Deadline

Traditional IRA Rules
••• The Traditional IRA rules allow you to wait until as late as April of 2015 to fully fund your 2014 tax year IRA contribution limits. Jupiterimages / Stockbyte / Getty Images

You still have time to fund your traditional Individual Retirement Account (IRA) for the tax year 2017 before the deadline hits in April of 2018. The traditional IRA gives investors tax-write offs for contributions, tax-deferral for most capital gains, dividends, interest, rents, and other profits earned by assets held within the account. It can also provide heightened protection of your nest egg from creditors in bankruptcy court and is one of the easiest, best ways to build wealth for retirement.

You have until tax day in April of 2018 to make your 2017 IRA contribution If you want to take advantage of these benefits for the current tax filing year, but if you don't hit your annual contribution limit, you can't go back in time and fund the amounts you've missed.

How a Traditional IRA Works

Opening, funding, and holding an IRA over time is fairly straightforward; here's a walkthrough of the steps:

  • Open a traditional IRA via a brokerage firm, mutual fund company, bank, or other financial institution, each of which will have its own product offerings.
  • Contribute money to the traditional IRA, and take a tax deduction for the amount you deposit. Be mindful that strict limits exist on the amount you can add to a traditional IRA in any given tax year.
  • Once you've funded your traditional IRA, use the money to invest in stocks, bonds, mutual funds, buy real estate, or a host of other assets. If you open a traditional IRA at your local bank, they might only allow you to purchase FDIC insured certificates of deposit. If you go with a brokerage firm, they'll allow you to purchase various assets from blue-chip stocks to index funds.
  • During the years or decades in which you keep assets in your traditional IRA, your investment profits grow tax-free. If you hold $1,000,000 worth of oil and bank stocks that pay you $40,000 a year in cash dividends, under almost all circumstances, you won't owe a penny in federal, local, or state taxes. Some foreign stocks withhold taxes on dividends if they don't have a favorable tax treaty with the United States, so be careful when acquiring international assets in a traditional IRA.
  • Any time after 59.5 years old, you can start withdrawing from your traditional IRA. Withdrawing funds any earlier triggers a 10% penalty unless you meet one of the IRS' exemptions. When you take money out of the account, you'll report it on your taxes as regular income. You'll pay taxes on these withdrawals, which serve as the income on which you live for the rest of your life.
  • Once you hit 70.5 years old, you won't be able to contribute any more funds, and the IRS mandates that you take a calculated Required Minimum Distribution (RMD) from your account, or you'll receive a stiff penalty of 50 percent of the amount you should've withdrawn.

Maximum Contributions to a Traditional IRA for Tax Year 2017

The IRA contribution limit for the tax year 2017 depends on your age and applies to your traditional IRA and any Roth IRA you have as well. The IRS looks at your total contribution to all IRAs when enforcing the maximum contribution limits. Once you reach 50 years or older, you can put aside a bit more money as a "catch-up" contribution beef up your savings in the years before you retire.  If you are 49 years or younger, you can contribute up to a maximum of $5,500 to all IRA accounts for 2017. If you're 50 years or older, you can contribute up to a maximum of $6,500 to all IRA accounts

Married couples can each have their own traditional IRA to maximize the amount they can save the tax shelter. For example, if a 52-year-old man were married to a 48-year-old woman, they could put aside a combined total of $12,000, with $6,500 going into his IRA and $5,500 going into her IRA. If one of the spouses doesn't work, IRA rules allow a stay-at-home husband or wife to make an IRA contribution using household funds so as not to penalize homemakers.

Can You Write Off Traditional IRA Contributions Made for Tax Year 2017?

In many cases, your traditional IRA contribution is deductible on your tax return. This allows you to lower your tax bill and incentivizes you to save for retirement. The income limits for deducting your contribution depend on whether or not you are covered by a retirement plan at work.

The IRS determines your income for traditional IRA eligibility by using a modified form of your adjusted gross income. This is different from the normal adjusted gross income you calculate on your tax return. It involves removing certain types of income, such as savings bond interest, and deductions such student loan interest. IRS publication 590-A (2017) describes the calculation of modified adjusted gross income in detail. If you think you are near one of the income limits for deductibility, talk to an accountant because you may be fine once you apply the modifications to your adjusted gross income.

Deduction rules for investors who are not covered by a retirement plan at their job, such as a 401(k) or 403(b) for the tax year 2017:

  • Single, Head of Household, or Qualifying Widow(er): No limit on tax deductibility based on modified adjusted gross income. You can deduct all contributions up to the amount of your contribution limit.
  • Married Filing Jointly or Separately with a Spouse Who Is Also Not Covered by a Retirement Plan at Work: No limit on tax deductibility based on modified adjusted gross income. You can deduct all contributions up to the amount of your contribution limit.
  • Married Filing Jointly with a Spouse Who Is Covered By a Retirement Plan at Work: A modified adjusted gross income of $186,000 or less is entitled to full deductibility up to the amount of your contribution limit. Between $186,000 and $196,000, the tax deduction you can take is phased out with lower and lower amounts until reaching $196,000, at which point, you cannot take any tax deduction for your traditional IRA contribution.

    Deduction rules for investors who are covered by a retirement plan at their job, for the tax year 2017:

    • Single or Head of Household: A modified adjusted gross income of $62,000 or less entitles you to deduct all traditional IRA contributions up to your contribution limit. If you earn more than $62,000 but less than $72,000, you can claim a partial deduction on your taxes. If you earn $72,000 or more, you can't take any deduction for your traditional IRA contribution.
    • Married Filing Jointly or Qualifying Widow(er): A modified adjusted gross income of $99,000 or less entitles you to deduct all traditional IRA contributions up to your contribution limit. If you earn more than $99,000 but less than $119,000, you can claim a partial tax deduction. If you earn $116,000 or more, you can't claim any tax deduction for your traditional IRA contribution.
    • Married Filing Separately: A modified adjusted gross income of less than $10,000 entitles you to a partial tax deduction on your traditional IRA contribution. An income of $10,000 or more means you can't take any deduction.

    In both cases, if you file your taxes separately and you did not live with your spouse at any time in the past year, the IRS will allow you to use the "single" rules to determine your traditional IRA tax deduction eligibility.