Jason Crump, Grand Rapids Financial Advisor
By Jason Crump
Tax time is here so now is the time to ask yourself, have you or can you make IRA contributions for 2009? IRA contributions are one of the easiest ways to reduce ones taxable income (as long as you qualify). Here are a few of the rules and limits to think about while preparing your taxes.
You still have time to reduce your taxable income and boost your retirement savings. The IRS gives tax payers until April 15 of the following year to contribute for the previous year’s earnings (for example; 2009 IRA contributions can be made up until April 15, 2010). The contributions can be made into a Traditional IRA or a Roth IRA.
The IRA limits for tax year 2009 are as follows:
Maximum Contribution Limits (If under age 50) $5,000.00
Maximum Contribution Limits (If over age 50) $6,000.00
As we mention the above limits we have to remind you that there are employment and income restrictions that come along with IRA contributions (we would recommend talking with your advisors or accountant to determine qualifications based on employment and income).
Now that we have reminded you about 2009 IRA contributions we wanted to update our readers and let them know there are some changes with regards to Roth IRA conversions and the 2010 tax year. This year the government is allowing any individual (regardless of income) to convert their Traditional IRA to a Roth IRA. Before this year income limitations were imposed on Roth conversions for those tax payers whose incomes were over $100,000. However, the recent tax law changes allow anyone to convert their Traditional IRA’s to a Roth IRA. One thing to keep in mind is that this is still considered a taxable distribution; hence one has to pay taxes on the pre-tax contributions and earnings that are converted to the Roth IRA.
The other major change will help tax payers lessen the tax burden on their converted IRA money. The new law states tax payers that convert money from their Traditional IRA to a Roth IRA can realize half of the tax in 2011 and the other half in 2012, thus spreading out your tax burden over a couple of years instead of all at once (which may cause other income to be taxed at a higher rate than usual). Again, we would recommend talking with your tax professional or advisor to help determine if the 2010 changes would benefit your individual situation.
Many people question whether contributing to an IRA is beneficial or not. According to Fidelity over half of Americans are currently not taking advantage of the benefits of IRA’s. The IRA may not be the sole vehicle that allows us to retire, but it will enhance our current level of retirement savings and allow retirees to live a more comfortable lifestyle during their retirement years (employer sponsored retirement plans may not be enough to provide the lifestyle individuals have grown accustomed to during their working years).
What we are trying to inform you of is that saving for retirement is important. In the past Americans have relied on Pension Plans and Social Security for their retirement income; not any more. Pensions have basically gone away and Social Security is changing and will change even more within the coming years. We should rely upon ourselves to establish good saving habits and take full advantage of what the government is willing to give us in the form of tax benefits in regards to investing.
FACTOID for the week: According to AP (Associated Press) and the Employee Benefit Research Institute the percentage of workers that have saved for retirement is down to 69% in 2010, a drop from 75% in 2009. Of the 69% that stated they have saved for retirement more than 25% of them have less than $1,000 in total retirement savings. This is a scary realization that we have to be aware of.
