By Sarah Brenner, JD
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The countdown to the 2017 tax filing deadline is on. The deadline is April 17, 2018, which is really only hours away. Time is running out. Is your IRA ready?
Making Your 2017 IRA Contribution
April 17, 2018 is the deadline for making a 2017 IRA contribution. This is true even if you have an extension to file your tax return. That does NOT give you extra time to make a traditional or Roth IRA contribution. So, if you are thinking about making a 2017 contribution, time is running out.
The rules do allow IRA custodians to accept prior year 2017 contributions after the tax-filing deadline if they are mailed with a postmark of April 17 or earlier. This is true even if the contribution does not reach the custodian until after the deadline has passed. Be sure to follow your custodian’s procedures for making an IRA contribution and clearly indicate that your contribution is for the prior year (2017). If you fail to indicate that it is a prior year contribution, the custodian may report it for the current year (2018). That can cause a tax mess.
If you are making a 2017 traditional IRA contribution that is deductible, you will want to be sure to report it on your tax return to claim that deduction. If you are making a nondeductible contribution, be sure to file IRS Form 8606 with your tax return. That is how you will claim your basis in your IRA. That will be important down the road when you take distributions from your IRA to avoid taxation on your nondeductible contributions. What about your Roth IRA contribution? Well, Roth IRA contributions do not show up anywhere on your tax return, but you will want to track them yourself to avoid complications with future Roth IRA distributions.
Time is not running out for all 2017 IRA transactions. After April 17, 2018, there are a number of transactions that can still be done.
If you are looking to make a SEP IRA contribution, you may have more time. The deadline is different than it is for traditional or Roth IRA contributions. The deadline to establish and fund a SEP for 2017 is the business’ tax-filing deadline, including extensions.
There is also still time to change your mind about a 2017 IRA contribution. The deadline to recharacterize a 2017 IRA contribution is October 15, 2018. For example, if you made a Roth IRA contribution and later decide that a traditional IRA contribution would have been a better move for you, you could recharacterize that Roth IRA contribution to a traditional IRA, even after the April 17, 2018 deadline.
There is still time as well to remove an unwanted contribution. For example, if you made a contribution to your traditional IRA and later discovered it was nondeductible, you can remove it, plus earnings attributable by October 15, 2018.
October 15, 2018 is also the deadline to remove true excess IRA contributions and avoid the 6% excess contribution penalty. If you miss this deadline you will be stuck paying the penalty and it will continue to accrue for each year the excess remains in the IRA.