Countdown to Filing: There's Still Time to Contribute to an IRA or SEP

The clock is ticking down to the tax filing deadline. The good news: There may still be an opportunity to save on your tax bill from last year. If you qualify, you can make a deductible contribution to a traditional IRA right up until the April 15, 2013 filing date and still benefit from the resulting tax savings on your 2012 return.

Due a Refund? You Have Options

Of course, you can receive a paper check in the mail. But you can also:

    1. Direct deposit the refund into more than one bank or credit union account. With a "split refund," you can divide it among as many as three checking and savings accounts and up to three different U.S. financial institutions.
    2. Direct deposit your refund into accounts at other financial institutions where mutual funds or retirement accounts are managed.
    3. Purchase U.S. Series I Savings Bonds. You can use a portion of the refund to buy up to $5,000 in savings bonds.
    Note: Only direct deposit a refund into accounts that are in your name, your spouse's name or both if it's a joint account. Some institutions require both spouses' names on an account to deposit a refund from a joint return.

Small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions.

You also have until Monday, April 15, to make a contribution to a Roth IRA.

Here are the main differences between a traditional IRA and a Roth:

Contributions to a traditional IRA are deductible on your tax return depending on your income and whether you -- or your spouse, if filing jointly -- are covered by an employer's pension plan (see table below). In contrast, contributions to a Roth IRA are not deductible.

Withdrawals from a traditional IRA are taxable, while withdrawals from a Roth are tax-free as long as the account has been open at least five years and you are age 59 1/2 or older.

At age 70 1/2, you must begin to take withdrawals from a traditional IRA or face steep penalties. But with a Roth IRA, you don't have to take withdrawals at any age, meaning the account can continue to grow tax-free for decades and be passed on to your heirs tax-free.

Below is a chart with all the details for this filing season. (Note: These figures are for 2012. They increased for 2013).

2012 IRA

Deadlines and Limits

IRA and
Roth IRA contributions

You can contribute up to $5,000 until Monday, April 15, 2013 ($6,000 if you were age 50 on 12/31/12).

SEP contributions

You can contribute up to $50,000 by April 15, 2013 or by the extended due date (up to Tuesday, October 15, 2013) if you file a valid extension. (There is no SEP "catch up" bonus.)

Age limits

You must be under age 70 1/2 at the end of 12/31/12 to contribute to a traditional IRA. Contributions to a Roth can be made regardless of age, if you meet the other requirements.

2012 IRA

Phase-Out Ranges

Traditional IRAs when not covered by a retirement plan at work

Any amount of adjusted gross income (AGI).

Traditional IRAs when active in an employer retirement plan

  • For married filing jointly between AGI of $92,000 and $112,000;
  • For single or head of household, $58,000 to $68,000;
  • For married, filing separately, $0 to $10,000, if you lived with your spouse at anytime during the year.

Traditional IRAs if spouse participates in employer-sponsored plan

Phase-out occurs between AGI of $173,000 and $183,000.

Roth IRAs

  • For married filing jointly, $173,000 to $183,000;
  • For single or head of household, $110,000 to $125,000;
  • For married filing separately, $0 to $10,000, if you lived with your spouse at anytime during the year.

An Option for High Wage Earners

Let's say you can't qualify for IRA deductions because you actively participate in an employer-sponsored retirement plan and your adjusted gross income exceeds the level allowed.

Fortunately, highly paid wage earners aren't completely closed out of the IRA market. Even if you can't deduct IRA contributions or contribute to a Roth IRA, you're still permitted to make nondeductible contributions to a traditional IRA. As with regular IRA or Roth IRA contributions, the limit for 2012 is $5,000, plus a "catch-up contribution" of $1,000 if you were age 50 or older on December 31, 2012.

Contributions to a nondeductible IRA allow you to build up tax-deferred earnings, just like a regular IRA, until distributions are made. This allows you to save more for retirement. The portion of your IRA distributions representing nondeductible contributions is tax-free.

Important: When making a deductible or nondeductible contribution, be sure to tell the IRA trustee that the contribution is for 2012. Otherwise, the trustee may report it as being for 2013.

Working Teens Can Also Have IRAs

Did your children or grandchildren earn some money working last year? If so, they also have time to make a 2012 IRA contribution. As you'll see, the IRA contribution strategy is a terrific idea because the children can potentially accumulate a truly amazing amount by retirement age.

Specifically, your child can contribute the lesser of earned income or $5,000 for the 2012 tax year.

Children with earned income have the option of contributing to either a traditional deductible IRA or a tax-free Roth IRA. The contribution limits are the same for both. Having your child contribute to a Roth account is usually the best alternative, even though it doesn't create a tax deduction. Why? Your child can later withdraw all or part of his or her Roth IRA contributions -- without any federal income tax or penalty -- to pay for college, buy a car, put a down payment on a new house or for any other reason. (However, he or she generally cannot withdraw any Roth account earnings tax-free before age 59 1/2.)

Of course, even though the child will have the right to withdraw Roth IRA contributions without any adverse federal income tax consequences, the best strategy is to leave as much of the account balance as possible untouched until retirement age.

Example: Let's say your child contributes $1,000 to a Roth account this year. After 45 years, the account would be worth $31,920 assuming an 8 percent annual return. Say your kid contributes another $1,000 next year and lets the money ride. The Roth IRA would be worth $61,475 after 45 years. As you can see, the numbers really start adding up. After age 59 1/2, your child can begin taking federal-income-tax-free withdrawals. In other words, your child will never owe any federal income tax on the accumulated Roth IRA earnings. In contrast, if your child contributes to a traditional deductible IRA, all subsequent withdrawals will be taxable income. Payouts before age 59 1/2 are also hit with a 10 percent penalty tax, unless they are used for certain IRS-approved reasons (including paying for college or a first home).

Here's another big reason for the Roth IRA alternative: Your child may not actually save any taxes by contributing to a traditional deductible IRA. Why? Because an unmarried dependent taxpayer's standard deduction amount automatically shelters up to $5,950 of earned income for 2012 from the federal income tax. (For 2013, the standard deduction increases to $6,100.) Therefore, contributing to a traditional IRA won't necessarily create any current tax savings unless your child has a fairly substantial amount of income. So a Roth IRA is generally the best move.

One more plus: Owning a Roth IRA (or a traditional IRA for that matter) generally won't cost your child any financial aid dollars at college time (at least not under the current guidelines). This is because the financial aid calculations generally don't count IRAs as assets.

Reminder: Report 2010 Roth Conversions on 2012 Returns

Taxpayers who converted amounts to a Roth IRA or designated Roth account in 2010 must generally report half of the resulting taxable income on their 2012 returns.

Normally, Roth conversions are taxable in the year the conversion occurs. For example, the taxable amount from a 2012 conversion must be included in full on a 2012 return. But under a special rule that applied only to 2010 conversions, taxpayers could generally include half the taxable amount in their income for 2011 and half for 2012. You don't have to worry about this if you chose to include all of it in income on your 2010 return. Ask your tax adviser if you have questions about your situation.

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