Here are the five reasons everyone should contribute to an IRA.
1) Income Tax Deduction. Many taxpayers who contribute to an IRA will get a tax deduction. Some taxpayers with higher incomes that participate in a retirement plan at work will not be able to get a tax deductible IRA. Taxpayers are allowed to contribute $5,000 annually to an IRA if they have at least that amount of earned income and are under age 70. Taxpayers over age 50 are allowed to contribute an additional $1,000 annually.
2) Likely State Income Tax Deduction. If you have a tax deductible IRA, you may possibly have a deduction for state income tax purposes. Many states, like Connecticut, allow the IRA deduction if it was allowed on the federal income tax return.
3) Tax-Deferred Earnings. Everyone under age 70 with earned income can contribute to an IRA. If your income is too high you can still make a nondeductible IRA contribution. Even though there is no tax deduction, the earnings will grow tax-deferred.
4) You Are On Your Own With Retirement. Back in the day, the company you worked for would provide you a pension when you retired. If you were in the union, they would give you a pension. Also, many people could collect social security when they retired. The corporation, or the union and the government would take care of you. They did this while you were working and when you retired. This is long gone. You are on your own with your retirement. This means you (likely) will need to contribute to an IRA as a 401(k) plan at work (if you have one), can only take you so far.
5) Distributions Are Not Required Until Age 70 1/2. The IRA account grows tax-deferred until distributions are made. Distributions can be made any time after age 59 1/2 without the premature distribution penalty of 10%. There is however required minimum distributions beginning on April 1 of the year following the year you turn 70 1/2. This allows the IRA to grow through the years on a tax-deferred basis.
ACTION ITEM: Contribute to your IRA, you're going to need it. You have until April 18, 2011 to contribute to your IRA for your 2010 tax return.
Thomas F. Scanlon, CPA, CFP®