IRA…All the Way…to Retirement!

The IRA (Individual Retirement Arrangement) is one of the more underutilized tools for retirement planning.  The primary benefit to an IRA is tax-deferred investing.  Income taxes are not paid until taxable distributions are made.  With limited exceptions, distributions made prior to age 59½ are subject to a 10% penalty in addition to income taxes.

Let's start with the basics.  Who's eligible for an IRA?  Just about everyone.  More specifically an individual who:

  • has earned income of at least the amount of the contribution
  • is under age 70½

That's it to have an IRA.  It is more complicated to determine if you can have a tax deductible IRA.  If you are an "active participant" in an employer sponsored retirement plan, there are eligibility limits based on Adjusted Gross Income ("AGI").  An active participant is an employee that participates in a 401(k) plan, profit sharing plan, or a defined benefit pension plan.  To determine if you are an active participant, just review your W-2.  If the "Pension Plan" box is checked off, then you are an active participant.

There is a phase out for deductible IRA's based on AGI.  In 2010 it's as follows:

Single person……………………………………………………………………………….$56,000 – $66,000
Married couple where both spouses are active participants……$89,000 – $109,000
Married couple where one spouse is an active participant………$167,000 – $177,000  

For those taxpayers who exceed the AGI limits, they are entitled to make a nondeductible IRA contribution.  Use Form 8606 to report your nondeductible contributions.

The annual limit for 2010 is $5,000.  Taxpayers age 50 and over are allowed an additional $1,000 in a so-called "catch-up" contribution.

ACTION ITEM:  You have until April 18, 2011 to fund your 2010 IRA.  Review your 2010 tax material as soon as possible to determine if an IRA makes sense in your situation.  Remember…IRA…all the way…to Retirement!

Thomas F. Scanlon, CPA, CFP®

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