Tuesday, July 23, 2013


As we are rapidly making our way through 2013, we wanted to take this opportunity to remind our readers about some of the ways that you can contribute toward your retirement savings and the increased limit amounts for each of these vehicles. One of the most popular and powerful retirement savings tools available to you is the individual retirement arrangement, or IRA. There are two major types; the traditional IRA and the Roth IRA.

Both types of IRA allow you to contribute as much as $5,500 in 2013. And if you are age 50 and older, the law allows you to make an additional “catch-up” contribution of $1,000. So, for our taxpayer audience that is 50 and older, you can contribute a total of $6,500 in 2013. The only catch is that you must have at least as much taxable compensation as the amount of your IRA contribution and you must be under age 70½. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount that you earned. 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 (provided you have enough).

For the purpose of IRA contributions, taxable compensation includes wages, salaries, commissions, self-employment income, and taxable alimony or separate maintenance. Other taxable income, such as interest earnings, dividends, rental income, pension and annuity income, and deferred compensation, does not qualify as taxable compensation for this purpose.

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, saving you money in taxes. 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 your contributions depends on your annual income and your income tax filing status. You are considered covered by an employer-sponsored retirement plan (i.e. a pension or 401(k) plan) if you were covered by such a plan for even one day during the year, even if you elected not to participate. We would be happy to help you determine if your contribution will be deductible.

If you are unable to make a deductible traditional IRA contribution, you should consider whether you qualify to contribute to a Roth IRA. While your contributions are made with after-tax dollars, and therefore are not deductible, if you meet certain conditions, your withdrawals from a Roth IRA will be completely income tax-free, including both contributions and investment earnings.

The same rules apply as far as the taxable compensation requirement (see above) and the contributory limits ($5,500 or $6,500 depending on your age) but you are allowed to make a Roth IRA contribution even if you are over age 70½. There are, however, strict income limitations that prevent most higher-paid taxpayers from being able to contribute to a Roth IRA. Again, we can help you determine if you qualify.

Even if your contribution is not determined to be deductible, making a non-deductible contribution is still an excellent way to force retirement savings. Since the contribution would be on an after-tax basis, when your contribution is withdrawn, it will not be taxable. Both the traditional and Roth IRAs feature tax-sheltered growth of earnings and allow a wide range of investment choices, making them excellent selections for retirement savings vehicles.

In addition to an IRA, most taxpayers also receive the benefit of a qualified employer-sponsored retirement plan associated with their job. For these qualified plans, you may defer up to $17,500 (or 100% of your eligible compensation, whichever is less) of your earnings in 2013. And for our audience over age 50, there is an allowable “catch-up” contribution of an additional $5,500 for a total maximum deferral of $23,000. This is a significant amount of money that can be invested into your plan and should not be overlooked.

If you elect to participate in this “catch-up” option (we definitely recommend you do so if you are financially able), you will need to make sure that your human resources or payroll department is aware that you want to participate. In our experience, because this election is not automatic when you reach age 50, this provision is often missed.

The deferrals that you elect to have taken from your paycheck may be on a pre-tax basis or a post-tax basis (if your plan has a Roth feature.) If offered, Roth contributions may be considered in lieu of pre-tax deferrals if you will not benefit from the tax savings associated with regular contributions. Either way, you have the potential to set aside a significant sum of money that will grow tax deferred until you reach normal retirement.

Most employer-sponsored plans also offer an incentive to participate, such as a discretionary matching contribution. It is important to pay attention to this additional benefit, if offered by your plan, as it can be a very effective way to assist in maximizing your retirement benefits in addition to being a lucrative opportunity to further grow your money without contributing your own funds.

Even if you are contributing to a 401(k) or other retirement plan at work, you should consider also investing in an IRA. Also noteworthy for 2013, the new lifetime gift and estate tax exclusion and generation-skipping transfer tax exemption is $5,250,000 and the annual gift tax exclusion is $14,000 per donor. Keep in mind that the annual gift tax exclusion is per donee. So, if you are married, you and your spouse together may gift up to $28,000 per donee. This can be an effective way to reduce your taxable estate.

The deadline to make your 2013 contribution is the tax filing deadline of April 15, 2014. In fact, many individuals making IRA contributions wait until the tax filing deadline to make their contributions each year. However, we suggest making an effort to get your contribution made at the beginning of the year. The S&P 500 stock index has produced positive returns in 72% of the calendar years going back to 1928. This means that many of those late deposits are missing out on the prior year’s earnings and could cost an investor $15,000 or more over the course of 20 years.

Our goal in this post is to make our readers aware of the increased amounts that can be contributed to various retirement saving vehicles for 2013. Even though we are already nearing the end of July, there is still time to maximize your personal contributions if you have not done so already.

As always, we would be happy to provide a complimentary review of your financial and tax situation if you are unsure if you are maximizing your benefits or if would like assistance in determining the best retirement vehicle for your individual financial situation.

Danielle Van Lear, CPA

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