Tax Tip: Saving for Retirement Series – Part 1: Traditional IRAs | Tip of the Week | October 27, 2010 | No. 14Saving for Retirement Series We are beginning a series of Tax and Money Tips to take a look at ways that you can save for retirement in a tax advantaged way. As we approach year-end, now is a good time to review your current retirement plan and consider any moves needed to maximize your tax savings.In this series we will cover over the next few weeks:
1. IRAs – both Traditional and Roth options
2. SEP Plans (Simplified Employee Pension)
3. Uni-k for Sole Proprietors
4. Profit Sharing and 401(k) Plans
This week we will highlight the Traditional IRA. An individual retirement arrangement (IRA) is a personal retirement savings plan that offers specific tax benefits. In fact IRAs are one of the most powerful retirement savings tools available to you. Even if you are contributing to a 401(k) or other plan at work, you should also consider investing in an IRA. Even if the IRA is not deductible, you should consider still making the contribution in order to get as much money each year into a tax-advantaged account.
A traditional IRA allows you to make annual contributions of up to $5,000 in 2010. Generally, you must have at least as much taxable compensation as the amount of your IRA contribution. But if you are married filing jointly, your spouse can also contribute to an IRA, even if he or she does not have taxable compensation. The law also allows taxpayers age 50 and older to made additional “catch-up” contributions. In total, they can put up to $6,000 in their IRAs in 2010.
Practically anyone can open and contribute to a traditional IRA. The only requirements are that you must have taxable compensation and be under age 70 ½. You can contribute the maximum allowed each year as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount you earned.
Your contributions to a traditional IRA may be tax deductible on your federal income tax return. This is important because tax-deductible (pretax) contributions lower your taxable income for the year, savings you money in taxes. Even if neither you nor your spouse is covered by a 401(k) or other employer-sponsored plan, you can generally deduct the full amount of your annual contribution. If one of you is covered by such a plan, your ability to deduct may be limited. Call us to discuss your own situation.
Questions or Comments?
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Mark Vitek, CPA/PFS, CFP®
…until next week.