As you might be aware, you still have until Monday, April 15. to make contributions to Traditional or ROTH IRAs–for 2012. ($5,000 total, between the two. $6,000 if you are over 50.) So, it is a last minute opportunity to defer (Traditional only) taxes from 2012 until later years. But, do your homework and know your rights.
Over the years, I have found that Bankers and even so-called IRA specialists didn’t always understand what can be done. Just recently, a young banker advised me that she could not contribute to an IRA since she makes contributions to her company’s 401(k). Always, be ready to second guess people in the Financial Services field, and even ask them if they are sure. Do your homework and don’t be afraid to ask questions.
So, I will make the following points, each of which I would recommend you discuss with your Tax Advisor, if you have one, prior to using:
1. Even though you contribute to a Company-Sponsored (A/K/A Qualified) Retirement Plan, you still may be able to contribute to either a Traditional or ROTH IRA. It would depend on your Annual Income. In years past, when I was contributing to a 401(k), in some years we could contribute to our Traditional IRAs, but not a ROTH. And, in other years, we were able to contribute to our ROTHs, but not a Traditional. But, we did contribute, to one or the other, every single year.
2. Last year, I took a distribution from my ROTH (no problem since I was over 59 !/2) and made a contribution, for the prior year, into my Traditional IRA–to get the tax deduction for 2011. If I had “re-configured” my IRA, shifting funds from the ROTH to the Traditional (in one step), in April of 2012, it would not have been considered a tax deduction for the prior year. Since I had just retired; my taxable income would be dropping. So, I did it in two separate steps–ROTH Withdrawal (in April 2012) and Traditional Contribution (for 2011). This reduced our Taxes for 2011, without having an impact on 2012 Taxes. The banker had to call the IRA Detp. for help.
3. Now I no longer work, however, I do receive small “deferred compensation” payments from my prior Employer. So, even though I don’t have “earned income”, I can roll it over into an IRA, since my former Employer reports it on a W-2.
4. I had reason to call the IRS to confirm my assumption on point #3; so, I also asked about my Wife’s pension payments, which are reported on a 1099-R, which we have normally received for 401(k) transfers to our IRAs. Once again, it could be rolled into an IRA as long as that is done within 60 days of receipt.
5. Social Security Payments are only partially taxable. So, as those become a larger portion of our Annual Income, it might make sense to shift money gradually from a Traditional IRA to a ROTH. You will need to pay the taxes; however, ROTH IRAs are much more flexible. You are not required to take an RMD (Required Minimum Distribution) when you reach 70 1/2, ROTH distributions are tax-free to you and they will also offer flexibility to our Beneficiary, when it goes to future generations.
6. For potentially large Estates, IRAs can be subject to the Estate Tax. So, consult with you Tax Advisor on that one. Perhaps that might provide a good opportunity for gifting to futurte generations.
You might laugh at my comment about calling the IRS to confirm Points #3 and #4; but they can be extremely helpful in confirming your assumptions. Some years ago, I was doing my taxes on Sunday, April 14, when I realized that I did not have a piece of information from our prior year’s return. I called the IRS, around 2:00 PM, the day before Taxes were due, and I received a quick response to my question.
Be sure to confer with your Tax Advisor with any specific Tax questions that you might have. And, Happy Tax Day!
NOTE: I have never had anyone prepare our taxes for us; however, we were audited once, when I was about 27. The points of contention were truly gray areas. So, I did my homework, went by myself and won. Dumb luck, I guess?