Diversified Tax Tidbits by MARK A. BURNS
We highly recommend that you save as much as possible towards your retirement. Even if you are fortunate enough to be covered by an employer’s retirement plan, it is unlikely that those benefits, combined with Social Security, will be sufficient to allow you to afford the type of lifestyle you wish to maintain in your retirement years. Therefore, supplementing those types of retirement funds with your own IRA can be very beneficial.
It should be emphasized up front that the deadline to put funds into an IRA for 2015 is April 15, 2016. Each year, you can put funds into an IRA for that year from Jan. 1 of the current year up to April 15 of the following year.
There are two types of IRA’s:
- Traditional IRA – Generally, you contribute funds now and get a tax deduction on your income tax return. The amount of the tax break you get depends on the tax bracket you are in. Then, when you withdraw the funds upon retirement, you pay taxes at your then-current tax rate.
- Roth IRA – This generally works the opposite of a traditional IRA – i.e., you do not get a tax deduction when you put the money in, and if you follow IRS guidelines, then any future withdrawals will be fully tax free.
In order to contribute to either type of IRA, you or your spouse must have sufficient earned income (i.e., from working) or alimony equal to or greater than the amount you want to put into the IRA. Beyond that, there are some income limitations that need to be considered.
If you are participating in your employer’s retirement plan, your ability to get a tax deduction for the contribution may be limited. In this case, if you are single, once your total adjusted gross income on your tax return reaches $61,000 ($98,000 if married), you begin to lose your tax deduction, and the portion disallowed becomes a non-deductible contribution. If your spouse participates in a retirement plan at work but you do not, then you begin to lose the ability to get a tax deduction for an IRA when your income hits $183,000.
The ability to put funds into a Roth IRA starts to be limited when your income reaches $116,000 (single) or $183,000 (married).
In this column we have discussed contributing to an IRA. In future months, we will discuss how to know which type of IRA is best for you and also what happens when you take money out of an IRA.
The above is a very general summary of what can be a very complicated subject. Each person’s particular situation can be unique. Always consult a tax professional if you are uncertain about how tax matters might affect you.
Mark A. Burns, M.B.A. is a CPA with Diversified Financial Solutions PC in Southbury. He can be reached at 203-264-3131 or Mark@DFSPC.biz.
