There Is Still Time to Make a 2013 Contribution To Your IRA!

Mar 11, 2014 1:46:10 PM / by Jason Shaw

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Why should this fact be important to you?  An IRA is an excellent tax-advantaged way to secure your retirement.  The law limits how much you can contribute each year, so if you have not yet maxed out your 2013 contribution, now is the time to make sure you’re getting the greatest possible benefit out of your IRA.  For 2013 and 2014, you can contribute a total of $5,500 to your traditional and Roth IRAs, assuming you earned at least that amount of taxable income during the year.  If you are at least 50 years old, the limit is $6,500.

Income Tax Benefits

What type of income tax benefit you receive depends upon which type of IRA you have.  A traditional IRA grows tax-deferred, meaning that you pay tax on earnings only when you withdraw them.  Depending on your income level and whether you are covered by a retirement plan through your employer, contributions to your traditional IRA may be tax-deductible as well.

Although contributions to a Roth IRA are not deductible, qualified withdrawals are not taxed, and the fund grows tax-free.  That means that as long as you follow the rules, you will not have to pay taxes on the earnings of your Roth IRA.

 

Limits on Contributions

Roth and traditional IRAs have different types of limits on contributions.  For a traditional IRA, the limit is age-based.  You must be under age 70 ½ at the end of the tax year in order to make cash contributions to a traditional IRA.  Roth IRA contributions can be made at any age.

Roth IRA contributions are limited by income.  Only taxpayers whose incomes fall below IRS limits are eligible to contribute to a Roth IRA.  For 2013, single filers may make the full maximum contribution only if their income is below $112,000, and they may contribute a reduced amount if their income is between $112,000 and 127,000.  For joint married filers, the 2013 limits are $178,000-$188,000.  These limits are increasing slightly for 2014:  $114,000-$129,000 for single filers and $181,000-$191,000 for married couples filing jointly.

 

Limits on Withdrawals

Withdrawals from a traditional IRA made before age 59 ½ are considered premature.  Unless an exception applies, premature withdrawals are subject to 10% penalty in addition to income tax.  Exceptions include circumstances such as disability, qualified educational expenses, significant unreimbursed medical expenses, and the purchase of a first home.

In addition to the age requirement, a Roth IRA must be open for at least five years in order for earnings to be withdrawn without tax or the 10% penalty, unless you qualify for an exception.  Contributions you have made, however, may be withdrawn penalty-free at any time.

 

Additional Benefit

Those with lower incomes can realize even greater benefit from making IRA contributions.  The Saver’s Credit (officially the Retirement Savings Contribution Credit) is available for tax year 2013 to married joint filers with incomes of $59,000 and below and to single filers who earn no more than $29,500.  These limits are also increasing slightly in 2014 to $60,000 and $30,000, respectively.  Depending on your income level and filing status, the Saver’s Credit allows you to take a tax credit of between 10% and 50% of the amount you contributed to your IRA during the tax year.  Remember that tax credits are more powerful than deductions because rather than merely lowering the amount of your income that is subject to tax, they directly reduce the amount of tax you owe or increase the amount of your refund.  The Saver’s Credit is a non-refundable credit, however, which means it will not reduce your tax liability to below zero.

 

If you have questions about retirement and tax planning, or if you need tax preparation services, the professionals at Boelman Shaw Capital Partners can help.  Contact us today to discuss how you can make the most of your 2013 return and develop a financial strategy that allows you to keep more of your hard-earned money in 2014 and beyond.

Material discussed herein is meant for general illustration and/or informational purposes only.  Because individual situations will vary, the information shared here should be used in conjunction with individual professional advice.

Topics: Financial Planning

Written by Jason Shaw