Now is the time to make that IRA contribution

Monday is the deadline for making a 2012 IRA contribution.

Only folks with earned income (wages or self-employed profits) are eligible to make IRA contributions.

The 2012 IRA contributions are limited to $5,000 or, if age 50 or older, $6,000 for each person.

The special rules on spousal IRAs allow a non-working spouse who has no earned income to do an IRA if the other spouse has enough earned income.

For example, if Joe has $20,000 of wages and Mary has none, Joe can do an IRA contribution and Mary can do a spousal IRA contribution as well.

If Joe had only $7,000 of earned income and Mary had none, then the total IRA contributions are limited.

Congress also has provided that if Joe is older than 70½ and working, but Mary is retired and is 58, Joe is not allowed to do an IRA contribution because he is older than 70½. Mary would be able to do a spousal IRA contribution, even though she has no earned income of her own.

The kinds of IRA contributions include the regular or traditional IRA that gives a tax-return deduction on page 1 of form 1040. If the contribution is for the year 2012 and made on or before April 15, 2013, it is allowed to be a 2012 tax-saving deduction.

Of course, another kind of IRA contribution is one to a Roth IRA. As you know, the contributions to a ROTH IRA do not give a current tax deduction. However, if the Roth IRA is in place at least five years and you’re older than 50½, all distributions are tax-free. That means the earnings escape income taxation.

Also, the rule for any distributions from a Roth IRA is, contributions (that gave no tax deduction) are deemed to be paid out first. So if, two years after making contributions to a Roth IRA, you need the money back for an emergency, those contributions can be distributed and are not taxed.

Another kind of IRA contribution is a regular or traditional IRA that is non-deductible. Then, that can be converted to a Roth IRA with only the earnings being taxed.

A wonderful idea is to help a young person who has some wages or earned income do a Roth IRA (limited to the earnings amount and the $ 5,000 maximum in 2012).

Did you hear? “When I was young, I found out that the big toe always ends up making a hole in a sock. So I stopped wearing socks.” — Albert Einstein

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.


Use the comment form below to begin a discussion about this content.

Sign in to comment