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It’s that wonderful time of the year again where we all have the same thing on our minds. I’m talking, of course, about one of life’s few certainties…taxes. To coincide with the season of giving, we also have the annual season of IRA contributions. The 2012 contribution deadline is April 15th, and the contribution limits are the 2012 limits ($5,000) instead of the higher 2013 limits ($5,500). Traditional and Roth IRAs both have different contribution and deduction rules. In this article I’ll be giving a brief overview of Traditional IRAs and Roth IRAs, but for a more in-depth explanation on deductions and/or contributions please contact your CPA, Petersen Hastings Wealth Advisor, or a slightly more expanded explanation is available on the IRS website.
A Traditional IRA is a retirement account that allows for tax-deferred growth. Contributions are tax deductible, but there might be limits on that deduction if you and/or your spouse have a retirement plan at work. If you or your spouse have a retirement plan at work it would be advisable to discuss deduction limits with your CPA. If neither you nor your spouse has a retirement plan at work the full contribution can be deducted. The 2012 contribution limit for an individual under the age of 50 contributing to all IRA accounts is $5,000 or taxable compensation for 2012, whichever is the smaller amount. For example, if you have two IRA accounts, an individual filing status, and you are under the age of 50, you can contribute $2,500 to each of your IRA accounts, but not $5,000 to both. If you are married, have filing jointly status, you and your partner both are under 50, and both of your combined taxable compensations exceeds $10,000, then both of you can contribute $5,000 across IRA accounts for a maximum joint contribution of $10,000.
Roth IRAs allow for tax-free growth and distribution, because contributions to a Roth IRA are taxable. The contribution limits for a Roth are the same as a Traditional IRA, but Roth contributions do have additional restrictions based on your modified AGI. Individuals that make over $125,000 ($183,000 married filing jointly) in 2012 cannot contribute to a Roth, and a reduced contribution amount begins at $110,000 ($173,000 married filing jointly).
Individuals who are over the age of 50 are able to “play catch-up”. In addition to the $5,000 contribution, you may contribute an extra $1,000, but you may only play catch-up if you have earned income. This additional contribution amount applies to both Traditional IRAs and Roths, but keep in mind that contributions to Traditional IRAs must cease the year you turn 70½.
There are penalties, age restrictions, and required minimum distributions (RMDs) for IRAs. In general, distributions taken before 59 ½ are subject to a 10% penalty tax. Excess contributions to either IRA types are subject to a 6% tax on the excess contribution. Traditional IRAs require a minimum distribution to commence April 1st following the year you turn 70 ½ and the year you turn 70 ½ contributions to the IRA must cease. Roth IRAs do not have RMD requirements and they do allow you to make contributions after age 70 ½.
The above explanation and break down is a general overview, and does not take into account individual circumstances or possible penalty exceptions. For any tax questions regarding IRAs, I recommend discussing them with your CPA or other tax professional. Additionally, if you have any financial inquiries or if you need help finding tax assistance please contact your Petersen Hastings Wealth Advisor.
March 20th, 2013
By Matthew Petersen