Last Call to Get Your 2012 IRA Deduction
There’s still time to contribute to an Individual Retirement Account for 2012 and, in many cases, grab a tax write-off
If you’re feeling a little guilty about not saving enough for retirement last year, it’s not too late to redeem yourself. You still have until April 15 to open an Individual Retirement Account for 2012.
Many of us don’t pay much attention to IRAs anymore, in part because it’s all we can do to fund a 401(k) plan, assuming we have one. That’s a shame, really, because IRAs have charms of their own.
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Even if you put money into a 401(k) last year, you’re still eligible to contribute to an IRA for 2012 and possibly get a tax deduction, too. If you earned income from self-employment in 2012, you’re eligible for a special type of IRA – known as a Simplified Employee Pension, or SEP – with higher contribution limits than standard IRAs.
You can open an IRA at most banks, brokerage firms or mutual fund companies and invest in just about any of their offerings, except for collectibles and life insurance. (If you already have an IRA and want to make a 2012 contribution, you can add to that account.)
Here’s a quick refresher on IRAs for your 2012 tax return:
These are the IRAs most of us grew up with. The money you contribute to a traditional IRA is tax-deductible (subject to income limits, as explained below) and your earnings grow tax-deferred. When you eventually draw money out, it will be taxed as ordinary income. Once you pass age 70½, you’re required to take at least the tax law’s minimum distributions each year.
Contribution limits for 2012: Up to $6,000 per person if you’re 50 or older, $5,000 if you’re younger. For 2013, the IRA contribution limits rise to $6,500 and $5,500, respectively.
Who’s eligible: Just about anybody under age 70½ with wages or other compensation in 2012 can contribute to a traditional IRA. But the amount you can deduct on your 2012 tax return will depend on your income, filing status and whether you’re covered by a 401(k) or another retirement plan at work.
If you’d like to have a 2012 IRA but your income was too high to qualify for a deduction (the gnarly specifics are below), you can still contribute to the retirement account and take advantage of the tax deferral on its earnings. Just remember that if you make nondeductible contributions to a traditional IRA, you must file Form 8606: Nondeductible IRAs.
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Social Security recipients under 70½ with earned income in 2012 who want to contribute to a traditional IRA need to do some special calculations, using the worksheet in Appendix B of IRS Publication 590.
Deduction rules: If you were single and not covered by a retirement plan at work in 2012, you can take a full deduction, regardless of your income. If you were single and covered by a retirement plan at work, you can take a full deduction if your modified adjusted gross income was $58,000 or less; you'll get a partial deduction if it was between $58,000 and $68,000 and no deduction if your income was more than $68,000.
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If you were married and plan to file jointly, you can deduct your full IRA contribution, regardless of your income, if neither you nor your spouse were covered by a retirement plan at work last year. You can also take the full deduction if you file jointly, had an employer-sponsored retirement plan and your joint modified adjusted gross income was $92,000 or less. (You get a partial deduction if it was between $92,000 and $112,000 and no deduction for income exceeding $112,000).
If you file jointly and your spouse was covered by a retirement plan but you weren’t, you can take a full deduction if your joint modified adjusted gross income was $173,000 or less and a partial one if it was between $173,000 and $183,000. There's no deduction for incomes above $183,000.
The income limits for IRA deductions are lower for married couples filing separately. IRS Publication 590 has the details.
Basically the mirror image of traditional IRAs. You don’t receive a tax deduction when you make a 2012 contribution, but withdrawals will be tax-free and immune from IRS penalties if you’re at least 59½ and have held the account for at least five years. As with traditional IRAs, the earnings in a Roth IRA grow tax-deferred.
Roth IRAs have two other advantages over traditional IRAs: You can contribute to a Roth regardless of your age, unlike a traditional IRA, where you must be under 70½. Also, Roth IRAs aren’t subject to required minimum distributions, so there’s no need to withdraw money starting at 70½ unless you want to do so.
Contribution limits for 2012: Same as traditional IRAs, although there are special rules for maximum Roth IRA contributions depending on your 2012 income. You don’t report Roth IRA contributions on your tax return, incidentally.
Who’s eligible: As with traditional IRAs, this depends on your income and filing status. But whether you have a retirement plan at work doesn’t matter.
Singles can make a full Roth IRA contribution if their 2012 modified adjusted gross income was under $110,000; partial Roth IRA contributions are allowed for singles with $110,000 to $125,000 in modified adjusted gross income.
Married couples filing jointly can contribute the full amount to Roth IRAs for 2012 if their modified adjusted grossincome was less than $173,000; they can make partial Roth IRA contributions if they earned between $173,000 and $183,000.
Worksheet 2-1 in IRS Publication 590 shows you how to calculate your modified adjusted gross income for a Roth IRA.
Traditional IRA Or Roth IRA?
Whether you should opt for a traditional IRA or a Roth IRA for 2012 depends in large measure on your anticipated tax bracket in retirement.
If you expect your taxes to go down, you might do better with a traditional IRA and take your tax break now, when it can do you the most good.
But if you expect your taxes to rise in retirement, perhaps due to a general increase in tax rates, a Roth IRA could be more attractive.
Of course, future tax rates are anybody’s guess.
Michael J. Garry, a certified financial planner in Newtown, Pa., says if you already have a 401(k), you might want to contribute to a Roth IRA so you’ll have a choice of taxable or nontaxable income to draw on in retirement. Then, you can decide which account to tap based on your tax rates at the time.
There are also two lesser-known types of IRAs that are worth a look if you qualify for them.
Spouses who had little or no income of their own in 2012 can contribute to traditional or Roth IRAs based on their husband’s or wife’s income if they file jointly.
So, for example, a 55-year-old couple with one employed spouse can contribute as much as $12,000 to their IRAs for 2012.
If you had self-employment income in 2012, you’re eligible for a SEP-IRA, which lets you contribute as much as 25 percent of your 2012 net earnings from self-employment, but no more than $50,000.
IRS Publication 560 explains how to calculate your net earnings, along with the other SEP IRA rules.
Greg Daugherty is a personal finance writer specializing in retirement. He was formerly editor-in-chief at Reader’s Digest New Choices and senior editor at Money.
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