When the tax deadline is looming, taxpayers looking for the Tax Fairy to wish away their tax problems often overlook the old-fashioned IRA. You can still make 2013 IRA contributions through April 15. An Individual Retirement Account contribution may be able to score you a 2013 deduction (or even a tax credit) for 2013; even if you don’t qualify for current tax savings, they are a nice and cheap way to build-up tax-sheltered savings.
IRAs come in two flavors: “traditional” and “Roth.” Traditional IRAs build up their income tax-free, but earnings on them are taxable when they come out. If you meet certain conditions, your traditional IRAs come with sprinkles: – a tax deduction. If you don’t get the deduction going in, your principal is tax-free going out.
Roth IRAs never offer a deduction, but they leave a sweeter aftertaste: if you hold them long enough, income on Roth IRA assets is never taxed. And unlike traditional IRAs, you are never forced to start withdrawing funds from the IRA, so the tax-free build-up can go on indefinitely.
Both traditional and Roth IRAs require you to have wage or self-employment net income. The limits for contributions are the lesser of your taxable compensation or $5,500 ($6,500 if you were 50 by December 31, 2013). You can contribute to a traditional IRA at any income level, but deductions phase out at higher income levels if you (or your spouse) are covered by a retirement plan at work. The availability of Roth IRA contributions phases out at higher income levels regardless of whether you participate in another retirement plan.
One very useful way to use Roth IRAs is for teenagers and young adults. A parent can fund a Roth IRA for them based on part-time job income — no matter what parent income is. This starts a tax-free retirement fund for the young earner at a very age, giving the power of compound interest lots of time to do its magic. And from what I’ve seen, parental Roth funding is much appreciated by the recipients.
While time is short, you can still fund a 2013 IRA if you make your contribution no later than April 15. You can set one up at your friendly community bank or online with a mutual fund company on you lunch hour. No, it probably won’t make your 2013 taxes go away, but it can be a nice step towards financial security for you or your kids.
This is the latest of our 2014 Filing Season Tips — a new one every day thorugh April 15!
Russ Fox, Bozo Tax Tip #4: Honey, You Don’t Exist!: “Perhaps it’s something in the water, but this year Aaron and I have seen multiple cases of individuals who have ignored that marriage license and filed as single if married.”
Kyle Pomerleau, When is My State’s Tax Freedom Day? (Tax Policy Bl0g) Iowa’s is this Sunday.
Kristy Maitre, How to Report National Mortgage Settlement Payments
TaxGrrrl, Taxes From A To Z (2014): X Is For XD
Paul Neiffer, Trusts Can Get You in Trouble
Hey, preparers: are you ready to trust the IRS to regulate your livelihood? A Week Before Tax Day, IRS Misses Crucial Windows XP Deadline (Washington Post, via the TaxProf)
Alan Cole, Mainstream Economics Support Low Taxes on Capital Income (Tax Policy Bl0g): “The overwhelming bulk of the evidence is that taxes have a negative effect on economic growth, and that the effect is particularly strong on tax bases that include capital income.” But, the rich! Inequality!
Donald Marron, Seven Tax Issues Facing Small Business (TaxVox): “America’s tax system is needlessly complex, economically harmful, and often unfair.”
Cara Griffith, Guidance Today, Gone Tomorrow (Tax Analysts Blog). “A recent Arkansas court opinion points out what might be a troubling trend in state taxation: the inability of taxpayers to rely on administrative guidance because the state can retract or supersede it on a moment’s notice.”
TaxProf, The IRS Scandal, Day 336. It was a big day, with evidence that Lois Lerner was working behind the scenes with the ranking Democrat on the Ways and Means Committee to harass the opposition.
William Perez, Tax Reform Act of 2014, Part 4, Tax Credits
David Brunori: I’ll Raise a Glass to Lower Booze Taxes (Tax Analysts Blog) “Jack Daniels is not bourbon, by the way, but Tennessee whiskey. There is apparently a difference, but frankly, after the first glass, I can never tell.”
Next: legislators are terrible at legislating. GAO Went Undercover to Discover Tax Preparers Are Terrible at Tax Preparing (Going Concern)