There is still time to reduce your 2012 tax liability by making an IRA contribution before the filing deadline of April 15, 2013 (but please don’t wait until the last minute). You may be able to contribute up to $5,000 for 2012. If you are over age 50, you may be able to contribute up to $6,000*. If you are married and both over age 50, you could save up to $3,360 combined in Federal Income Tax for 2012 (28% tax bracket) provided that both of you have contributed up to the $6,000 threshold. Not only would your tax burden be reduced by $3,360, your $12,000 combined IRA contributions would continue to grow tax deferred until withdrawal at retirement age.
Another option to consider is a Roth IRA contribution up to the same $5,000 limit. Similarly, those over 50 can contribute up to $6,000**. There is no immediate tax benefit to the Roth IRA as after tax dollars are used to fund this retirement vehicle. However, the benefit is that the Roth IRA is allowed to grow free of Federal and State tax. Unlike the traditional IRA, there is no tax due when you begin to take money out at retirement age***. Because Roth withdrawals at retirement are not taxable, they can provide the additional benefit of tax bracket management. Simply put, money taken from a Roth IRA at retirement might allow one to control in which tax bracket they fall. Roth IRAs can be a consideration for those who will be in the same or higher tax bracket upon retirement.
If you have already maximized your 2012 IRA (and Roth IRA) contributions, 2013 contributions can be made with new increased limits. The contribution limits for 2013 are $5,500. If you are over age 50, the new limit is $6,500 per person. To help facilitate 2013 contributions, you may wish to consider setting up monthly automatic checking deductions. Please let us know if you would like to consider this option.
Please contact us as soon as possible if you would like to make a 2012 IRA contribution or if you have any questions related to IRA contributions.
The Portfolio Advisors Team
*If you are covered by a company retirement plan, the phase out range for IRA deductibility is $92,000-$112,000 (married filing jointly). If you are not covered by a company plan but your spouse is covered, the phase out range is $178,000-$188,000.
**Roth IRA phase-out limits for a married couple is $173,000-$183,000.
***Roth earnings are subject to Federal and State taxes as well as penalties if taken before age 59 ½.