IRA Taxes in 2017: What You Need to Know

It's critical to save for retirement, and IRAs give you a golden opportunity to save on your taxes and achieve the financial security you need. IRAs offer a variety of tax breaks, but you have to know all the rules associated with them to find out what you can and can't do in your own personal situation. Nearly anyone can use some type of IRA, however, so it makes sense to take a closer look to see what options are available to you.

When's the deadline to contribute to an IRA?

If you want to make a contribution to an IRA, you have to do so by the deadline for filing taxes for the given tax year in question. So what many people don't realize is that you can still make an IRA contribution for 2016, as long as you do so by the filing deadline of April 18. For contributions for the 2017 tax year, you can wait beyond Dec. 31 if you wish, potentially waiting as long as mid-April 2018 to get your IRA funded.

Image source: Getty Images.

How much can I contribute to an IRA?

The contribution limits for IRA are the same regardless of whether you're making a contribution for the 2016 or 2017 tax year. Those who are under 50 years old can contribute up to $5,500, while those 50 or older have a higher $6,500 limit. However, in certain situations outlined below, your contribution might be further limited.

Can I deduct my entire traditional IRA contribution?

Traditional IRAs offer deductible contributions, but for those who are covered by a 401(k) or other employer plan or whose spouse is covered, income limits apply that can reduce or eliminate the deduction you can take for those contribution. The limits on adjusted gross income for 2016 and 2017 are below.

Data source: IRS.

If your spouse is covered by a 401(k) but you're not, higher limits apply to joint filers. Joint filers get a full deduction with income up to $184,000 in 2016 or $186,000 in 2017, and it phases out between $184,000 and $194,000 in 2016 and between $186,000 and $196,000 in 2017.

Keep in mind that you can always make a traditional IRA contribution. The only thing these limits do is potentially prevent you from deducting the contributed amount on your tax return.

Can I contribute to a Roth IRA?

In contrast to the traditional IRA, income limits can actually prevent you from making a Roth IRA contribution at all. You'll find the Roth limits below.

Data source: IRS.

Which is better for me: a traditional or Roth IRA?

If you have a choice of either type of IRA, it can be difficult to make a smart decision. The key, though, is understanding their benefits. Because traditional IRAs give you a deduction now, the higher your tax bracket is right now, the larger your tax savings will be now. However, the trade-off is that you have to pay taxes on traditional IRA withdrawals in retirement. So if you expect to be in a high tax bracket when you retire, you might end up paying even more in taxes later on with a traditional IRA.

Roth IRA contributions aren't tax-deductible, but you typically don't have to pay taxes on Roth withdrawals after you retire. So if you're in a low tax bracket now, then you don't give up much by picking a Roth and not getting a current deduction. Moreover, if you expect your tax bracket to rise later, then avoiding future taxes with a Roth is a smart move.

Can I take my retirement money out early?

IRAs are primarily for retirement, and so there are typically 10% penalties for taking money before reaching the magic age of 59 1/2. However, there are exceptions to the penalty. Withdrawals for certain higher education expenses, medical expenses, first-time home purchases, or disability-related expenses can sometimes escape the penalty. There are other methods as well, although they can get complicated quickly. For traditional IRAs, you'll also have to include withdrawn amounts in taxable income.

IRAs are a useful tool for retirement savers. By knowing the ins and outs of these tax-favored accounts, you can use them to maximum advantage when they're available.