In today’s economic environment, finding efficient ways to save for retirement is becoming increasingly important. Making the most of your hard-earned income was made easier with the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”). With increased eligibility limits and higher contribution limits, these IRAs now offer more taxpayers financial advantages that can help them maximize their retirement savings, and meet more immediate needs, such as the costs of higher education.
A traditional IRA now offers eligible taxpayers the front-end advantage of tax-deductible contributions up to $5,5001 in 2013. With a traditional IRA, contributions and earnings are not taxed until they are withdrawn, and earnings accumulate tax-deferred. Because of this deferral feature, funds may accumulate more quickly than they would in a taxable account. Keep in mind, though, that withdrawals prior to age 59 1⁄2 are generally subject to a 10% penalty tax in addition to income taxes.
Did You Know About the Increased Eligibility for a Traditional IRA?
Higher income limits allow more taxpayers to qualify for tax-deductible contributions to a traditional IRA. In 2013, partial or full tax-deductibility for contributions will be available for taxpayers with adjusted gross incomes of up to $127,000 (single filers) or $188,000 (joint filers). If neither spouse is covered by an employer-sponsored plan, contributions are fully deductible regardless of income level.
Also, if the adjusted gross income of joint filers is less than $188,000, a non-working spouse can contribute and deduct (fully or partially) $5,500, or $6,500 if age 50 or older1 in 2013 annually to a traditional IRA — even if their spouse is covered by an employer’s retirement plan.
New Withdrawal Opportunities
Normally, at age 59 1⁄2, you can begin to withdraw funds from a traditional IRA, penalty-free. IRAs allow more penalty-free withdrawals before age 59 1⁄2 to help with more immediate expenses — such as the purchase of a first home ($10,000 lifetime maximum), or qualified education expenses. With this opportunity, taxpayers can use all or some of their IRA funds even before retirement. (Note: Withdrawals from deductible IRAs are taxed as ordinary income, and, if made before age 59 ½, are subject to a 10% penalty tax, unless an exception applies. Also, required minimum distributions must begin by April 1st of the year following the year you reach age 70 1⁄2.)
Is a Traditional IRA Right for You?
Depending on your specific financial circumstances and goals, a traditional deductible IRA could be a good vehicle for your retirement funding. A contribution to a deductible IRA provides an immediate tax benefit and tax-deferred growth, as well. The benefits of tax-deferred growth can make a tremendous difference in retirement accumulation. Also, if you expect your taxable income to decrease at retirement when you begin withdrawing funds, a traditional IRA may be the right choice for you, since you can deduct contributions at high tax rates and possibly take them and earnings out at lower tax rates.
To learn more about traditional IRAs and other retirement funding options that can help you fulfill your retirement goals, contact Troy Barrow, LUTCF, Financial Representative at (646) 580-5189.
1 The $5,500 amount ($6,500 for ages 50 and older) is effective through 2013, and will remain the same in 2014. Typically for years beginning after 2008, the maximum annual contribution is indexed for inflation.
Feel welcome to contact us for a complimentary review of your personal situation. AIPS does not provide legal or tax advice, please consult your tax and legal advisors regarding your individual situation.
Posted by Troy Barrow, LUTCF – Troy is an independent Agent practicing professionally for six years and is the owner of Arlington Insurance Planning Services, licensed in the States of New York and New Jersey. You may contact Troy at 646 580-5189 or tbarrow@aipsny.com.
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