There’s Still Time to Fund a 2011 IRA

Contact: Gigi Thompson Jarvis
202.822.6232, x119
gjarvis@naea.org

download a Word version of this press release

For Immediate Release

WASHINGTON, DC (January 5, 2012) Wishing you’d done more to reduce your tax burden in 2011? Many people don’t realize that there’s still time to fund a Traditional IRA for 2011. The deadline for contributions to IRAs is April 17, this year’s filing deadline. If you are under 50, you may contribute a maximum of $5,000 to a Traditional or Roth IRA; those 50 or over may contribute up to $6,000.

Contributing to a Traditional IRA can help to lower your tax burden for 2011 if you meet the following criteria: you are not currently eligible for a tax-deferred retirement plan, or you have an adjusted gross income of $56,000 or less for singles, or $90,000 or less for married couples filing jointly. If you are married, and your spouse is eligible for a company retirement plan, but you are not, your contribution is fully deductible as long as your combined annual income does not exceed $169,000.

If you don’t meet those criteria and can’t take the tax deduction, there is still a very good reason to consider investing in an IRA as soon as possible: the tax-deferred interest compounding offered by the Traditional IRA and the tax-free interest compounding that the Roth offers to those who meet certain conditions. To avoid taxes on the accumulated interest generated by a Roth IRA, you must hold it for a minimum of five years or meet one of the following qualified exemptions: reach the minimum age of 59 1/2; spend up to $10,000 for a first-time home purchase; or have a disability. While estate taxes may have to be paid on the value of the Roth IRA upon the death of the holder, beneficiaries will not be subject to income tax on any part.   

In choosing the option that’s right for you, consider the pros and cons of paying taxes up front or waiting until retirement. While your contribution to a traditional IRA saves you in taxes now, Uncle Sam ultimately will demand his due; withdrawals from a Traditional IRA in retirement are fully taxed, and raise the income figure used to compute the taxability of your Social Security. Contributions to a Roth IRA, on the other hand, are not deductible now, but by paying taxes on your contribution in the years the money is earned, you will avoid being hit with the tax bill in your golden years. There are no withdrawal requirements for a Roth, and the compounded interest may be tax free.

Changes took effect on January 1, 2010, that allow you to convert a traditional IRA to a Roth IRA regardless of your income or filing status. If you are considering a conversion this year, keep in mind that you will have to pay taxes on all previous contributions, but not immediately. You will have until your 2012 taxes are due on April 15, 2013 to pay up. But be careful! Converting a large amount and waiting until April to pay the taxes may result in an underpayment of tax penalty. 

If you meet the criteria but don’t need the additional deduction for 2011 and are expecting to owe more in taxes this year, consider opening an IRA for 2012. Between now and April 17, you may fund a Roth or Traditional IRA for either 2011 or 2012.

To ensure that you take advantage of all available tax free savings, tax credits and deductions for 2011, the time is right to consult with a licensed tax professional, such as an enrolled agent (EA). To locate an EA in your area, visit the searchable “Find an Enrolled Agent” directory at www.naea.org.

About Enrolled Agents

Enrolled agents are tax professionals licensed by the US Department of the Treasury to represent taxpayers before all administrative levels of the IRS. While attorneys and certified public accountants are also licensed, only enrolled agents specialize exclusively in taxes. Enrolled agents are required to complete many hours of continuing education each year to ensure they are up-to-date on the constantly changing tax code and must abide by a code of ethics. To find an enrolled agent in your area, visit the website of the National Association of Enrolled Agents at www.naea.org and look for the “Find an Enrolled Agent” directory.