CARL WATTS & ASSOCIATES
July 13, 2015
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Washington DC
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tel/fax 202 350-9002 |
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With life expectancy rates rising on a regular basis, it is not surprising that the government is trying to encourage retirement planning as well as health coverage. In fact, you may be more familiar with contributions to these plans being deducted directly from your paycheck and reported on your W-2s.
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As you found out in our previous newsletter, contributions to a Health Savings Account as well as to a traditional Individual Retirement Arrangement (IRA) are deducted on your Form 1040 as an adjustment to income.
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A traditional Individual Retirement Arrangement, which may sometimes be called the original IRA, or regular, or ordinary IRA, is plainly defined by the IRS as being any IRA that is not a Roth IRA or a SIMPLE IRA. An IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement.
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The tax advantages referred to mean, in a nutshell, that you may be able to deduct some or all of your contributions to it, depending on your circumstances, and that generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed.
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Anyone who receives taxable compensation during the year (or, if filing jointly, whose spouse receives compensation) and is not age 70 ½ by the end of the year, can open and make contributions to a traditional IRA. Compensation refers to whatever you earn from working or services rendered and may vary from amounts shown in box 1 of Form W-2 to earnings from self-employment. |
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You can open, at any time, different kinds of IRAs with a variety of organizations. You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also open an IRA through your stockbroker. Any IRA must meet Internal Revenue Code requirements.
Your traditional IRA can be an individual retirement account or annuity. It can be part of either a SEP or an employer or employee association trust account. |
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As soon as you open your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator).
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Contributions must be in the form of money (cash, check, or money order) but property cannot be contributed. |
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Contributions must be made by due date. Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. |
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There are limits and other rules that affect the amount that can be contributed to a traditional IRA. For 2014, as well as 2015, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts: |
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This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible.
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| Whether your IRA contribution is deductible depends on three factors: your filing status, your adjusted gross income, and whether you are covered by a retirement plan at work. | ||||||
Traditional IRA Contribution Deduction
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Generally, you can deduct the lesser of the contributions to your traditional IRA for the year, or the general limit. |
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This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf. |
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| If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial deduction or no deduction at all, depending on your modified adjusted gross income (which is AGI without considering certain amounts, like the IRA deduction, foreign earned income exclusion, student loan interest deduction, and a few others) and your filing status. |
| If you are covered by a workplace retirement plan, your phase out range for 2014 is as follows: |
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| If you are not covered by a retirement plan at work, your phase out range for married couples filing jointly is $181,00 to $191,000 (if your spouse is covered by a workplace retirement plan). |
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For 2015 if you are covered by a workplace retirement plan, your phase out range is as follows: |
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| If you are not covered by a workplace retirement plan, your phase out range for married couples filing separately is $183,00 to $193,000 (if your spouse is covered by a workplace retirement plan). |
| If you are a single or head of household filer and are not covered by a retirement plan at work, you can take the full deduction up to the year’s contribution limit, regardless of your income. |
| If you’re married filing jointly or separately, and neither spouse is covered by a work-based retirement plan, you can take the full deduction up to your contribution limit, regardless of income. |
| You have to report your tax deductible IRA contribution directly on the first page of Form 1040 (Line32) or Form 1040A (Line17). You don't need to itemize to report this deduction. |
| If some of your traditional IRA contribution is not-deductible, consider contributing the deductible portion to a Traditional IRA and the remaining non-deductible portion to a Roth IRA, if you are eligible, of course. If all your traditional IRA contribution is not deductible, you might want to contribute to a Roth IRA altogether. |
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| Planning for your retirement is very important, nowadays more than ever, and professional advise may the best choice to make sure that your retirement funds are placed with the most favorable plans available out there for your particular financial situation. |
