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Give Your IRA Some Love Before April 15

  • 25 March 2015
  • Author: Cari Holbrook
  • Number of views: 3700
Give Your IRA Some Love Before April 15

If you wish you had saved more for retirement in 2014, there’s still time. Until April 15, 2015, you can still make a 2014 contribution to your Traditional IRA, Roth IRA, SEP-IRA or even simple 401(k). Here’s why funding these accounts before the tax deadline can help you earn more for retirement and reduce your taxable income.

What You Can Contribute

According to the IRS, the limit on annual contributions to any of the IRA types listed above is $5,500. However, for individuals aged 50 and over, there is an additional $1,000 catch-up contribution limit allowed. For 401(k) plans, the contribution limit for employees is $17,500, with the catch-up contribution limit for employees aged 50 and over being an additional $5,500.

What You Get in Return

As far as your individual tax deduction amounts go, what’s allowable is based on certain factors. Contributions to ROTH accounts are not tax deductible.  For other IRA and 401(k) plans, there are limits for those taxpayers at or above a certain income level who are covered (or whose spouses are covered) by an employer’s retirement plan. You can view those limits here.

If you’re not covered by an employer’s plan, you’re likely allowed a full deduction for your IRA contribution, unless your modified Adjusted Gross Income (AGI) is higher than $181,000. Here’s how the IRS breaks it down (image from IRS.gov):

How It Grows Over Time

Most taxpayers understand that fully funding an IRA each year can really add up to a significant amount of savings. But would you like to see for yourself?  Use this Traditional IRA Calculator by AARP to get a better idea of how your savings can add up. Albert Einstein once said that compound interest is the eighth wonder of the world.

And here’s more food for thought: If you find yourself waiting until the last minute to fund your IRA each year (yes, meaning right now), you could be paying what Vanguard calls a “procrastination penalty.” Vanguard’s research suggests that those who contribute regularly throughout the year (with automatic installments, for instance) take advantage of compounding interest that could result in, for example, an extra $15,500 on $165,000 invested over 30 years.

Need More Time?

Taxpayers with SEP-IRAs or solo 401(k)s and who have filed extensions have until October 15, 2015, to fund those accounts for 2014. Why take more time to fund last year’s account? Perhaps it was a particularly great year and you need to offset capital gains. Or perhaps 2015 is generating more income for you and you’d like to “spread the wealth” by reaching the maximum contribution limits for both 2014 and 2015. Since these two types of accounts are for self-employed individuals and small business owners , they tend to have more flexibility than their counterparts.

Strategic Contributions

While contributions to IRAs can be limited based on your Modified AGI, you can employ a strategy whereby you make a nondeductible IRA contribution and then roll that account into a ROTH account, which is perfectly legal.

Don’t Forget to Distribute

It’s been well reported that most business owners may never retire. Even if you do, you likely won’t do it before age 70½, that magic age in which an annual minimum distribution on Traditional, SEP and Simple IRAs and 401(k)s is required. If you reached that age in 2014 and have one of these plans, be sure to form a strategy now to begin withdrawing the money, whether or not you’re retired. Failing to make a required minimum distribution can result in a 50 percent excise tax.

For more information or to help develop a tax-beneficial contribution and/or distribution strategy, contact us. April 15 is just around the corner!

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