The Internal Revenue Services offers three tax forms of varying length. Though having a retirement plan might mean you have to use one of the longer tax forms -- either Form 1040 or 1040A -- you'll be glad you did when you see how much you save. Whether you can use Form 1040EZ depends on what type of retirement plan you have and what you're doing with it.
Contributions to employer-sponsored plans, such as 401(k)s and 403(b)s, are made with pretax dollars, so it's not necessary to deduct them on your taxes. For example, say your salary is $40,000, but you had your employer take out $3,000 for your 401(k) plan contribution. When your employer tells you (and the IRS) how much you earned on your W-2, it will show only $37,000 of taxable income. So, because you don't need a line for the deduction, you can still file your taxes with Form 1040EZ.
Traditional and Roth IRAs
Contributions to traditional IRAs disqualify you from using Form 1040EZ. There's no room on the form to deduct your contributions, so you'd be missing out on a big tax break. Even if you're trying to make nondeductible contributions, you need to file Form 8606, which is filed with Form 1040 or 1040A, not Form 1040EZ. On the other hand, Roth IRA contributions aren't deductible, so they don't appear on your tax return. So, the 1040EZ is still an option.
If you want to claim the retirement savings credit, you can't use Form 1040EZ. Instead, use Form 8880 to figure the credit and Form 1040 to report it. The credit reduces your tax bill by up to $1,000 -- half of your first $2,000 of qualifying contributions. To be eligible, you have to make contributions to a qualifying plan, which includes IRAs and employer plans; be 18 or older; have your adjusted gross income fall below the annual limits; and not be a full-time student.
Gains in Accounts
IRAs and qualified employer plans, such as 403(b)s and 401(k)s, are all tax-sheltered accounts. This means the gains in the accounts aren't taxed as you earn the money -- only when you take distributions. So, if you just have money in your retirement plan, but didn't contribute or withdraw, you don't have any tax reporting obligations. As a result, you can still use Form 1040EZ for your personal tax return that year.
If you're taking money out of a retirement plan, you can't use Form 1040EZ. Distributions from tax-deferred retirement plans, such as traditional IRAs, 401(k)s and 403(b)s, count as taxable income when you take the withdrawal, and Form 1040EZ just doesn't have the lines for retirement plan income. Even if you're taking a tax-free withdrawal from a Roth IRA or designated Roth account, you still have to report that on your taxes, and Form 1040EZ just doesn't have the space.
- Internal Revenue Service: Topic 352 - Which Form – 1040, 1040A or 1040EZ?
- Internal Revenue Service: Publication 590 -- Individual Retirement Arrangements (IRAs)
- Internal Revenue Service: Retirement Topics - Benefits of Saving Now
- Internal Revenue Service: Retirement Topics - Contributions
- Internal Revenue Service: Form 8606
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