You Have Until April 15 to Make 2014 IRA Contributions!

You have some time still to make 2014 IRA Contributions! That gives you 3 months to decide.

If you’ve been through the drill before, make it easy on yourself and open the IRA in the same institution as in the past, so all the IRAs are in one place and easier to manage.  For both 2014 and 2015 you can contribute $5500, plus another $1000 if you’re 50 or older.

Why Save in an IRA

The big tax play with IRAs is that the money grows tax-free year after year. So if you put in $5500 and it grows to $15,000, the additional $9500 of appreciation is not taxed as it grows.  That means the initial contribution, and the earnings on it, grow tax free. It’s the optimal tax shelter.

Why? If the same funds were in a regular investment account, those $9500 in earnings would be taxed each year as they accrue. The taxes due, would whittle down the assets and there is less compound growth. That’s what makes an IRA such a good deal.

With a regular IRA, you take a tax deduction for your contribution to the IRA. For example, if you make a $3500 contribution to an IRA, you can deduct $3500 on your tax return. You’ll pay income taxes on the funds when you withdraw them from the IRA.

With a Roth IRA, the tax play is even better. Contributions to a Roth IRA are not tax-deductible, but you don’t pay tax on withdrawals. This means you pay tax on the money you contribute to the Roth IRA (so-called “after-tax contributions) but everything you withdraw down the road is tax-free.

With both types of IRAs, you can begin making withdrawals at age 59 ½ without a 10 % early withdrawal penalty.  Beginning at age 70 ½ you MUST take a required minimum distribution, based on your life expectancy.  In most cases, your life expectancy is adjusted each year so the amount you must withdraw each year may change.

To Roth or Not to Roth

If you really need a tax deduction now, to reduce payments you may owe the IRS now, a tax-free contribution may make sense for you. For example, if you find you owe the IRS $5,500 in taxes, it may make more sense to contribute to an IRA instead for the same funds.

But if that is not your situation, i.e., you don’t need the tax deduction, the right to full tax-free withdrawals from a Roth IRA is an unbeatable deal. In my opinion, it trumps a current deduction for a contribution to the IRA. But not everyone can contribute to a Roth.

To be able to contribute to a Roth IRA, your income has to be below certain limits:

  • If you have adjusted gross income up to $116,000 (for singles) or $183,000 (for marrieds) you can contribute to a Roth.
  • If your income is between $116,000 to $131,000 (for singles) or $183,000 to $193,000 (for marrieds) you’ll be able to make a pro-rated contribution to a Roth IRA.
  • If your adjusted gross income is above the high number, you can’t make an after-tax contribution to a Roth. You’re only choice is to make a contribution to a regular IRA.

Another Bonus with IRAs

Whether you begin withdrawals at age 59 ½ or when you’re required to at age 70 ½, the funds not withdrawn continue to grow and earn. If you still own your IRA at the time of your death, your designation form can name your spouse or kids as beneficiaries, and they can withdraw over their life expectancies, if the planning is done right.

With tax-free accrual and stretched-out payout periods, you can take care of your family for a long time, even when you’re gone. Make sure your IRA beneficiary designation form is up to date and names the people you want to benefit.  If no designation is made, by default the IRA will go to your estate, and pass under your will. Likely any stretch pay-out opportunity will be lost.

Parker Press Inc. has provided this information concerning the subject matter covered, for educational purposes. Parker Press Inc. does not render legal or other professional advice, and information here is not a substitute for the advice of an attorney, nor does it constitute the rendering of legal or professional advice or services to a particular individual. If legal or other expert assistance is needed, the services of a qualified professional should be sought to address the specific needs in your situation. 

Susan G. Parker, Esq.

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