Last Update: Wednesday, July 23, 2014
|Time Remains to Contribute to IRA, Save on Taxes|
|Written by CAROLE FELDMAN|
|Thursday, 17 February 2011 02:51|
Is your tax bill too high? You may be able to cut it and save for your retirement at the same time.
You can make a contribution to an IRA until April 18, this year's filing deadline, and deduct the amount on your 2010 taxes. The maximum deduction is $5,000 or $6,000 for those 50 and older. Those 701/2 and older are not eligible to make contributions. There are also limits, based on adjusted gross income, on how much you can deduct from your taxes if you are covered by a retirement plan at work.
But income limits that had prevented some taxpayers from rolling over a traditional IRA to a Roth IRA were removed starting in 2010.
Contributions to a traditional IRA are generally tax-free, but the distributions are taxed. In a Roth IRA, the contributions may not be deducted from your taxable income, but the distributions, principal and income, generally are not taxable when you withdraw the money. For both, there are penalties for early withdrawal.
If you converted to a Roth IRA last year, the amount of the conversion must be reported on your 2010 return using Form 8606. The resulting income is subject to tax, but you have a choice on when to declare it for income tax purposes. You can include all of it as income on your 2010 return or defer it, declaring half in 2011 and the other half in 2012.
Mark Luscombe, principal tax analyst at CCH, a provider of tax, accounting and audit information, said the choice was more of an issue before Congress extended the Bush tax cuts for another two years. "With rates being equal, you're probably better off postponing," he said.
However, for some it might be better to declare all the income from the conversion in 2010. For example, "if they know that their income is going to go up and that might put them in a higher bracket. Even though officially the rates are the same, your individual circumstances might not be," Luscombe said.