What If You Fail to Contribute Nondeductible IRA Contributions by April 15?
An individual retirement arrangement (IRA, frequently also known as an individual retirement account) is a tax-advantaged retirement savings account, IRAs offer a way to provide retirement income and reduce your taxes. However, the IRS regulates how and when contributions can be made to IRAs. Failure to follow these rules can lead to heavy penalties.
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IRA Contribution Rules
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For 2011, IRA contributions are limited to $5,000 each year. However, taxpayers age 50 and older may contribute an additional catch-up contribution of $1,000 annually for a total contribution of $6,000. Contributions for each year can be made until the due date for filing tax returns the following year, which usually is April 15. For example, an IRA contribution made before April 15, 2011, can be designated as a 2010 contribution.
Deductible IRA Contributions
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Contributions to a traditional IRA are tax-deductible if they meet certain income requirements. In 2011, if the taxpayer is covered by a retirement plan at work, his income must be less than $56,000 if filing single or less than $90,000 if filing jointly to take a full deduction up to the amount of his contribution limit. Single filers earning between $56,000 and $66,000 and couples filing jointly earning between $90,000 and $110,000 can take a partial deduction up to the amount their contribution limit. Those making more than those limits cannot take a deduction on their traditional IRA contributions. These figures only apply to people covered by a retirement plan at work. Taxpayers not covered by a retirement plan can take a full deduction up to their contribution limit regardless of income. Contributions to Roth IRAs are not tax-deductible.
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Failure to Deposit Deductible Contributions
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If the contribution is not made by April 15 of the following year, no additional contribution can be made for that year. If the taxpayer filed his income taxes showing a deductible contribution, but did not make the contribution in time, he must file an amended tax return. The amended tax return must show that the contribution was not made, and any additional taxes must be paid immediately, plus any applicable interest and penalties.
Reporting Nondeductible Contributions
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Contributions not made prior to April 15 may not be designated as previous year contributions. No other contributions may be made for that year. Nondeductible IRA contributions must be reported on Form 8606. If you are married and you both make nondeductible IRA contributions, you must each file Form 8606. If you file a Form 8606 and do not deposit the amount you reported by the April 15 deadline, you may be subject to a $100 penalty for each overstatement unless you can show reasonable cause.
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