December 31st came and went, so now it is time to file your 2012 tax return. You may have plugged the numbers into TurboTax and not liked what you found. Is there any way to reduce your tax liability for 2012 now that we are in 2013? Yes there is!
IRA contributions can be made for the previous year until tax filing day of the current year
You can contribute $5,000 ($6,000 if 50 or older) to a Traditional IRA or Roth IRA for 2012 until April 15th, 2013. This means that if you forgot to contribute to your IRA, you can still do so.
Should I contribute to a Traditional or Roth IRA?
If you want to reduce your tax liability for 2012, then you will need to contribute to a Traditional IRA. Remember, Traditional IRA contributions are tax deductible, while Roth IRA contributions are not, however money will come out of the Roth IRA tax free in retirement. If you are in a low tax bracket, are getting a refund, or your income is too high for a Traditional IRA, you should consider contributing to a Roth IRA.
Are there income limitations for contributing to a Traditional IRA?
Yes there are, and they are complicated. If you have a retirement plan at work, such as a 401(k), then the Adjusted Gross Income (AGI) limitations are:
Married Filing Jointly: $92,000
Married Filing Separately: $10,000 (The IRS really dislikes MFS filers... sorry...)
If you do NOT have a retirement plan at work, and neither does your spouse, there are no income limitations.
If you do not have a retirement plan at work, but your spouse DOES have one, then the AGI limitation is $173,000.
Client Case Study
I have a client that files Married Filing Jointly. They had around $150,000 AGI for 2012, and the husband has a 401(k) through his employer. The wife is a stay at home mom with limited earnings for 2012. The wife can contribute $6,000 (is over age 50) to a Traditional IRA, however the husband can’t. They will save about $1,649 in taxes for 2012 by contributing $6,000 to her Traditional IRA.
You must have earned income to contribute to an IRA. However, a spouse without income can use their spouses earnings to make contributions!
Bonus Tax Credit
If you are in a low income tax bracket, you may also be eligible for the Retirement Savers Tax Credit. Depending on your income and filing status, you could get a tax credit of 10% - 50% of your IRA contribution. This means if you contribute $5,000 to a Traditional IRA, you will get the tax deduction, as well as a tax credit worth $500 - $2,500! Click here to learn more about the tax credit.
Are you going to be making an IRA contribution for 2012 before April 15th 2013? Feel free to ask questions in the comment section!
Alan Moore is a fee-only financial planner and founder of Serenity Financial Consulting in Shorewood WI. Connect on Google+. You can contact him at email@example.com, 414-455-5313, or visit his website at www.SerenityFC.com. Want more education? Download your free guide to the “10 Easy Steps To Securing Your Financial Future Today.”