John R. Bullis: Save taxes with a regular IRA
August 19, 2013
There are many ways to reduce your individual income taxes. However, sometimes the "plain vanilla" of a regular IRA contribution is just fine.
The 2013 IRA contribution limit is $5,500. Plus, the "catch-up contribution" for those who will be 50 by Dec. 31 is an additional $1,000. If you are 70½ or older during all of 2013, you are not eligible to do a regular IRA contribution, but if you have "earned income" you might consider doing a ROTH IRA contribution.
The deduction is claimed on the first page of form 1040. You do not need to "itemize deductions on schedule A" to claim the contribution.
The contribution is always yours, and it will be handy to pay some of the expenses you will have in the future (medical, buying a car, general living, travel, etc.).
It will grow with earnings. Some clients have been surprised to find their IRA account increased in value as much as or more than their required minimum distributions. When you become 70½, you are required to begin annual distributions. The amount required to be paid to you changes each year, but it starts out just a little less than 4 percent of the balance of the account at the previous Dec. 31.
Young folks have a wonderful benefit of time for the investment to grow with earnings. Compound interest (earnings) has been called one of the wonders of the world. The sooner they can contribute to their IRA, the better. But they need to invest it well to get the most earnings over the many years before they retire.
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You benefit most from doing the contribution as early in the year as you can. That just gives more time for the earnings to increase the value of the account. And, if you are moving the money from a taxable interest earning account, doing it early in the year will reduce your taxable interest.
But "wait, there's more." You can do a contribution for a 2013 IRA account even after the year is over. Congress has decreed that if you pay the contribution by the income tax return filing deadline of April 15, 2014, you can deduct it on your 2013 income tax return.
Sure, there are some special rules if you have a retirement plan at work. But if you can't do a regular IRA contribution because of earning too much, look at doing a nondeductible, but still good, ROTH IRA contribution.
You must have "earned income" to qualify for making an IRA contribution. That is wages, net profits from a sole-owner business and alimony. Combat pay earned by a member of the armed forces qualifies, even if it is excluded from gross income.
Did you hear? "Long ago, when men cursed and beat the ground with sticks, it was called witchcraft. Today it's called golf."
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.