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®
Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.
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