2009 is quickly coming to a close and the deadline for 2010 tax returns will be here before we know it, but it’s not too late to make contributions to your traditional IRA. Although, it’s not as attractive as the Roth IRA (in regards to tax free money), the traditional IRA still has its place for those looking to get a tax deduction and boost your retirement nest egg. Especially those that need a tax deduction at the last minute. The only downside with traditional IRA’s is that you don’t always get a tax deduction for making a contribution. The rules can be complicated and it all depends on your income limits and whether you have access to another retirement plan (such as a 401k).
As a refresher, you are allowed to contribute $5,000 to a traditional IRA, and an additional $1,000 if you are over the age of 50 with the catch up provision. If you haven’t funded one, don’t worry…..it’s not too late. You have until April 15th of next year to make the contribution for this year. That’s for all you procrastinators out there.
Rules on Getting the Tax Deduction
Step One: Determine the planned tax filing status.
Step Two: Complete this step only if the IRA holder is filing Married Filing Jointly.
Does the IRA holder or his/her spouse currently participate in an Employer-Sponsored Retirement Plan?
- If the IRA holder participates in an employer-sponsored plan and his/her spouse participates in an employer-sponsored plan and the IRA holder would like to make a deductible IRA contribution select the column “IRA Holder Participates”.
- If the IRA holder participates in an employer-sponsored plan and his/her spouse does not participate in an employer-sponsored plan and the IRA holder would like to make a deductible IRA contribution select the column “IRA holder Participates”.
- If the IRA holder does not participate in an employer-sponsored plan and his/her spouse does participate in an employer-sponsored plan and you would like to make a deductible IRA contribution select the column “Only Spouse Participates.” (Remember, if neither the IRA holder nor his/her spouse participate in an employer sponsored retirement plan, contributions are always fully deductible.)
Step Three: Determine the estimated Modified Adjusted Gross Income.
Step Four: Determine if you will be 50 years of age or over by December 31 of the tax year for which you are contributing.
Just because you don’t get a tax deduction on the IRA, does not mean that can’t fund it. The remaining proceeds become a non-deductible IRA if you decide to fund the whole amount. With the 2010 Roth IRA conversion event just a few months away, this might not be a bad planning strategy, too.