Just a quick update as tax season is on us and in some situations contributing to your IRA may lower your tax bill. If you are self-employed, you may be able to deduct up to $52,000 from your 2014 Earned Income, and then use that money for your retirement investments. Read on.
2014 IRA contributions need to be made no later than April 15, 2015. The earlier you get it in the better – mistakes happen, and the IRS doesn’t care. Give yourself some time for the unexpected.
a. Under 50 — $5500
b. Over 50 — $6500
c. Remember to report your contribution – it’s a deduction UNLESS you have contributed to a 401k for 2014 in which case you may not be able to
deduct your IRA contribution. Check with your tax professional and/or 401k plan administrator.
d. You cannot contribute to an IRA if you do not have earned income.
e. If you are over 70 ½ you cannot make a contribution to a Traditional IRA.
a. Income limits as follows;
i. Single tax filers: Up to $114,000 in Modified Adjusted Gross Income
ii. Joint tax filers: Up to $181, 000 in Modified Adjusted Gross Income
b. Your contribution is not a deduction.
c. You can contribute to a ROTH IRA at any age, provided you have earned income, meet the income limits, and are not disqualified due to already funding a traditional IRA for the period.
SEP IRA (Self Employed)
a. 0 – 25% of your compensation up to $52,000.
b. Must be a sole proprietor, partnership, business owner or earn and report self employed income.
c. Eligible employees must receive the same percentage contribution.
d. Remember to report your contribution – generally SEP IRA contributions come off your Earned Income total on a dollar for dollar basis, so you might drop a tax bracket. Check with your tax professional.
You can contribute to an IRA subject to the above restrictions even if you have already contributed or maxed out your 401k for 2014.
ROTH vs. Traditional?
This is pretty simple. If you qualify and don’t need (or don’t qualify for) the tax deduction, put the money in the ROTH. Why? Qualified ROTH withdrawals are tax free. Traditional IRA withdrawals, even if made after 59 1/2, are subject to income taxes. Bet on that being a bigger and bigger bite of your retirement funds as time passes.
Just a reminder that these are guidelines – neither my firm nor I are qualified tax professionals and therefore do not provide tax advice. Check with your tax professional.