Tax Tips: Still Time to Contribute to an IRA

It’s not too late to make a tax year 2012 contribution to your IRA, or even establish an IRA if you do not already have one. The deadline for 2012 contributions is April 15, 2013.

The maximum amount allowable for tax year 2012 IRA contributions is $5,000 for individuals under the age of 50. This amount increases to $6,000 for individuals who are 50 years of age or older. For tax year 2013, these contribution limits increase to $5,500 and $6,500, respectively. There are distinct characteristics for each type of IRA which affects the tax treatment of your contributions, as well as your later distributions.

The basic rules of a traditional IRA allow an individual to deduct the contributions on his or her tax return. This does depend, however, on the taxpayer’s income level, as well as whether or not they are covered by a retirement plan at work. Later in life, when the money is withdrawn, the amount is generally taxable.

Roth IRAs are different in that the contribution is not a deduction on the individual’s tax return, not is the money taxable when a distribution occurs. This is appealing to many because it provides for tax free growth of the investment. Investors in a Roth IRA may withdrawal the principal amount contributed at any time without incurring tax penalties.

If you decide to contribute to a traditional IRA, don’t forget that a ten percent penalty will be imposed on the amount of the distribution if it is withdrawn prior to you turning 59 ½. There are some exceptions to this penalty: disability, rollover to a different retirement account within sixty days of the withdrawal, or if you used the money to pay for medical expenses, college expenses or, in some cases, to purchase a home, to name a few.

Before making an IRA contribution, be sure that you meet all of the eligibility requirements. IRS Publication 590 provides an abundance of information on IRAs that may be a helpful tool to get you started. You can make your contribution at any time during the year or until the tax filing deadline. You are permitted to make your contribution, even though you may not have earned enough income to match the contribution, as long as you are certain that you will earn the amount before the end of the year. If money is available, make your contribution early to reap the benefits of a year of tax deferred or tax free growth. If funds aren’t readily available, only contribute what you can afford, whether it be a reduced amount or a monthly or per pay amount.

There are various investment options and numerous benefits of investing in IRAs. Remember, April 15, 2013 is the deadline for tax year 2012 contributions and tax filing extensions do not apply to IRA contributions. Take advantage of this tax planning and savings opportunity today.

Disclaimer – Shana R. Kennedy is a CPA with Baer and Company CPAs, which advertises with Journal Register Co. publications.

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