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NORMAN — Many people don’t realize that there’s still time to fund an IRA for last year. The deadline for contributions to IRAs is April 15, the filing deadline. For tax year 2013, you may deduct a maximum of a $5,500 contribution to a traditional IRA if you are under 50 years old; those 50 or over may deduct up to $6,500.
Contributing to a traditional IRA can lower your tax burden for 2013 if you meet certain criteria. If you are filing single and are not currently eligible for a tax-deferred retirement plan, or are married, filing jointly and neither you nor your spouse has a retirement plan through an employer, you can take the full deduction no matter what your modified adjusted gross income.
If you have a retirement plan at work and have a MAGI of up to $59,000 for singles, or up to $95,000 for married couples filing jointly, you can still take the full deduction. If you are married and your spouse is eligible for a company retirement plan but you are not, your contribution is fully deductible as long as your combined annual income does not equal or exceed $178,000.
For the Roth IRA, you pay the taxes now, but have the advantage of compounding interest, tax free, until retirement. You may contribute up to the $5,500/$6,500 limits stated above if you are a single filer with a MAGI of up to $112,000/year, or a married couple filing jointly with a combined MAGI of under $178,000.
If you don’t meet those criteria, there are still good reasons to consider investing in an IRA as soon as possible: the tax-deferred interest compounding offered by the traditional IRA and the tax-free interest compounding that the Roth offers to those who meet certain conditions. And while taking money out of your IRA before you reach 59 years of age will result in a 10 percent additional tax, there are exceptions to that rule.
You may be able to avoid the additional tax if you use the money to pay qualified education expenses; spend up to $10,000 for a first-time home purchase; or become disabled. In the case of a Roth, before withdrawing the interest earned, you must have held the IRA for at least 5 years. You can take out your contributions, or “basis,” at any time.
In choosing the option that’s right for you, consider the pros and cons of paying taxes up front or waiting until retirement. While your contribution to a traditional IRA saves you in taxes now, Uncle Sam ultimately will demand his due — withdrawals from a traditional IRA in retirement are fully taxed, and raise the income figure used to compute the taxability of your Social Security.
Contributions to a Roth, on the other hand, are not deductible now, but by paying taxes on your contribution in the year the money is earned, you will avoid being hit with the tax bill in your golden years. There are no withdrawal requirements for a Roth, and while estate taxes may have to be paid on the value of the Roth upon the death of the holder, beneficiaries will not be subject to income tax on any part.
To ensure that you take advantage of all available tax-free savings, tax credits and deductions for tax year 2013, you should immediately consult with a licensed tax professional, such as an enrolled agent. To locate an EA in your area, visit the “Find an EA” directory at naea.org.
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