All week we have been discussing retirement plans. On Tuesday we discussed SIMPLE Plans, Wednesday we discussed SEP IRAs, Thursday we moved on to Solo 401(k) Plans, yesterday we talked about Self-Directed IRA Plans, and today we are going to discuss Traditional and Roth IRAs.
An IRA is an Individual Retirement Account, which acts like a savings account that can have tax advantages. These advantages can make it an ideal way to sock away a lot of cash for retirement. There are two different types of IRAs; Traditional IRAs and Roth IRAs.
With a Traditional IRA, you can receive a tax deduction for contributing to the plan. The maximum that you can contribute to the plan depends on certain factors. For tax year 2012, if you are under 50 and you are not covered by another plan, you can typically contribute $5,000.00 to an IRA. If you are over 50 you can increase your contribution by the “catch-up” amount of $1,000.00 for a total of $6,000.00. For the contribution to count for 2012, the contribution has to be made by April 15, 2013 (including extensions). For tax year 2013, the maximum contribution is $5,500.00. If you are 50 or over, the “catch-up: contribution is increased by $1,000.00 making your total IRA contribution $6,500.00. For tax year 2013, the contribution has to be made by April 15, 2014 (including extensions).
The amount of your contribution to a Traditional IRA may be limited by your Modified Adjusted Gross Income (MAGI), and whether you are covered by a retirement plan at work.
If you are not covered by a plan at work your deduction may be limited by the following amount:
Single or Head of Household:
Your Modified AGI
2012 Contribution Limit
Anything
Full Deduction
Married Filing Joint
If your Modified Adjusted Gross income is between
2012 Traditional IRA Limit
Less than $173,000.00
Full Deduction
Between $173,000.00 and $183,000.00
Phased out Deduction
$183,000.00 or more
Ineligible
Married Filing Separately
If your Modified Adjusted Gross income is between
2012 Traditional IRA Limit
Between $0.00 and $10,000.00
Phased out Deduction
$10,000.00 or More
No Deduction
The following tables demonstrate the deductibility of your IRA if you are covered by a qualified plan
Single or Head of Household:
If your Modified Adjusted Gross income is between
And you’re covered by a plan at work
$0.01 - $59,000.00
Full Deduction
$59,000.00 - $69,000.00
Partial Deduction
$69,000.00 or more
No Deduction
Qualifying Widow(er)
If your Modified Adjusted Gross income is between
And you’re covered by a plan at work
$0.01 to $95,000.00
Full Deduction
$95,000.00 to $115,000.00
Partial Deduction
$115,000.00 or more
No Deduction
Married Filing Joint
If your Modified Adjusted Gross income is between
And you’re covered by a plan at work
$0.01 to $178,000.00
Full Deduction
$178,000.00 to $188,000.00
Partial Deduction
$188,000.00 or more
No Deduction
Married Filing Separately
If your Modified Adjusted Gross income is between
And you’re covered by a plan at work
$0.01 to $10,000.00
Partial Deduction
$10,000.00 or More
No Deduction
A Roth IRA is an Individual Retirement Account with a twist. With the Roth, you can set aside a specific dollar amount after taxes. The Roth provides tax free growth of your money, but because it is set aside after tax, you do not get a tax deduction for the contribution. If you leave the money in the Roth IRA for five years, and you take the money out after 59 ½, the distribution is tax free.
The maximum contribution limits are the same for a Roth as they are for a Traditional IRA. For 2012, you can put $5,000.00 into a Roth if you are under age 50. If you are 50 or older you can put in the “catch-up” contribution of $1,000.00 for a total contribution of $6,000.00. For 2013, your contribution limit is $5,500.00 if you are under age 50 and $6,500.00 if you are age 50 or older. The contributions must be made by the due date of the tax return, including extensions.
Just like Traditional IRAs, Roth IRA contributions are limited by MAGI limitations.
The limitations are:
Your Filing Status
Modified AGI
Contribution Limit
Single
Up to $110,000.00
Up to Maximum
Head of Household
Between $110,000.00 and $125,000.00
Phased out Contributions
Married Filing Separately (you and your partner did not live together)
Above $125,000.00
Ineligible
Married Filing Jointly
Modified AGI
Contribution Limit
Less than $173,000.00
Up to Maximum
Between $173,000 and $183,000.00
Phased out Contributions
More than $183,000.00
Ineligible
Married Filing Separately and you did live with your partner
Modified AGI
Contribution Limit
$0.00
Up to Maximum
Between $0.00 and $10,000.00
Phased out Contributions
More than $10,000.00
Ineligible
As you can see there are many advantages to Traditional IRAs and Roth IRAs. Before contributing to these plans, you should consult a tax advisor.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, and Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle
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