Even though 2010 has ended, you still have until April 18, 2011, which is this year's filing deadline, to make your 2010 contribution to your IRA. You even have time to establish an IRA if you have not done so already. So, what are you waiting for?
For tax year 2010, as well as 2011, the maximum amount allowable for an IRA contribution is $5,000 for individuals under the age of 50. The contribution maximum increases to $6,000 for those individuals who are 50 years of age or older. The type of IRA to which you contribute will determine the tax treatment of your contributions, as well as your later distributions.
The basic characteristics of a traditional IRA include deductible contributions and taxable withdrawals. The individual is entitled to deduct the contribution on his or her tax return, depending on income levels and whether or not the individual is covered by a retirement plan at work. When the money, principal and earnings, is withdrawn later in life, the amount is generally taxable. As for Roth IRAs, the individual's contribution may not be deducted from his or her income, but the distributions are generally not treated as taxable income. This type of investment vehicle allows for tax free growth of principal and earnings. Contributors to Roth IRAs are also permitted, at any time, to withdraw the principal contributed without paying any tax or penalties on the withdrawal.
When contributing to a traditional IRA, it is important to remember that a ten percent penalty is imposed on the amount of the distribution if withdrawn prior to the taxpayer reaching age 59 ˆ½. You may be able to avoid the penalty for early withdrawals if you are disabled, if you rolled money over to a different retirement account within sixty days of the withdrawal, or if you used the money to pay for health insurance, medical expenses, college tuition, or to purchase a home, in some cases.
Before contributing to an IRA, make sure you meet the eligibility requirements. This will prevent you and your tax preparer any unnecessary headaches. Many people wait until December or April of the following year to make their IRA contributions. There really is no benefit to waiting until then to make the contribution if you have the money available and you know that you are entitled to make a contribution. Essentially, you will be missing out on an extra year of tax deferred or tax free growth. You can make the contribution even though you have not yet earned enough income to match the contribution, as long as you are certain that you will earn it before the end of the year. And, if cash flow is a problem, contribute what you can. There is no requirement to contribute the entire amount in one lump sum. Instead, set aside an amount per pay or per month to contribute.
Take advantage of the benefits of IRAs. Start investing today. Remember, April 18th is the deadline for making 2010 contributions and tax filing extensions do not apply to IRA contributions. Be sure to notify your financial institution of the tax year to which the contribution applies to avoid potential problems later. So don't wait...get started today!
Shana R. Kennedy is a Certified Public Accountant with Baer and Company of Morgantown. Questions and comments to Shana can be directed to Shana@BaerAndCompanyCPAs.com