I've heard you can reduce your taxable income by opening an ira. My question is when you fund your ira, do you need to have the money deducted from your paycheck? Otherwise, how does the IRS know the money is money earned in the current tax year and not prior savings dollars, or does it not matter?
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1A traditional IRA is funded with before-tax money and reduces your taxable income. A Roth IRA is funded with after-tax money and does not reduce your taxable income.– Ben MillerCommented Sep 14, 2015 at 16:09
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You may be conflating IRAs with 401k or 403b plans, which are managed by an employer and funded by payroll deductions. If your employer offers such a plan (whether you participate or not), you can also use an IRA on your own, though there is a maximum income limit for the amount a separate traditional IRA will reduce your taxes. For single filer in 2015, it phases out between $61000 and $71000. irs.gov/Retirement-Plans/…– user662852Commented Sep 15, 2015 at 13:45
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2 Answers
No, you don't have to have the money deducted from your paycheck. The IRS doesn't get a copy of your paycheck anyway.
When you file your annual tax return (form 1040), there's a line there to write down the amount you contributed to the IRA. In fact, you can contribute to the IRA after the year ended, until the Tax Day of the next year, so that you can make sure your contribution will actually be deductible (not always they are).
The IRA custodian (the brokerage firm/bank where you opened the IRA account) will provide you with a deposit confirmation and form 5498. A copy of form 5948 is also sent to the IRS.
answered Sep 14, 2015 at 14:57
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2@OP As a general rule, Form 5498 for Year X is rarely issued before the Year X tax return filing deadline of April 15, X+1 or so. So, the numbers on Form 5498 for Year X cannot be used in preparing the tax return for Year X; the taxpayer must keep track of how much was contributed and to what kind of IRA. Also, for IRA contributions for Year X that are made between Jan 1, X+1 and April 15, X+1 should be clearly spelled out as such (don't screw this up!) because they might get recorded as Year X+1 IRA contributions Commented Sep 14, 2015 at 22:25
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So for Year X, beyond just knowing how much money was deposited into the IRA, do you actually need any info from the 5498 to do your Year X taxes? Commented Sep 15, 2015 at 18:06
And on the last sentence, it doesn't matter when or where the money was earned (money is fungible, so there's generally not even any way to tell), but you do have to have sufficient earned income (that's basically money you earn from working, not from dividends and interest or selling stock and the like) in the contribution year to cover the IRA contribution.
