Between now and your tax filing day is your last chance to build your retirement and potentially reduce your 2007 income tax liability. If you are not sure this is a wise use of your money, you should ask yourself the question, “Will my Social Security and the amount I have already saved provide the retirement income I want for my entire retirement?” If the answer to this question is “No,” then you should strongly consider adding to your retirement account.
Before writing the check, you should determine the type of retirement contribution to make and the amount. To do this, you should review the simple rules provided by the IRS. Okay, okay! So the rules are not so simple! Here are some highlights for tax year 2007.
For individual retirement accounts (IRAs), you must have ‘earned income’ to be able to make a contribution. If you are married, you are able to count as earned income the income of your spouse. For a couple to share income, there must be enough earned income to equal or exceed the contributions to IRAs by both spouses. Contributors under the age of 50 as of December 31, 2007 can contribute up to $4,000, and those 50 and over can contribute the maximum of $5,000. While I would encourage contributing the maximum, something is better than nothing.
While everyone with earned income can contribute to an IRA, not every contribution is deductible. If your W-2 has the pension box checked or you are self-employed and have a SEP plan, you are covered by an employer plan and subject to income limitations. This means your contribution is deductible as long as your income is below the limit. Modified adjusted gross income amounts for singles is $52,000 and for married filing jointly is $83,000 to allow the entire contribution to be deductible. A partial deduction is permitted in both cases when AGI (Adjusted Gross Income) falls within the next $10,000. When income is more than $10,000 higher than the limit, then the contributions are not deductible.
Roth contributions have the same contribution limits as ‘Traditional IRAs’, but eligibility varies from the traditional IRA. Contributions to Roth IRAs also require the contributor to have earned income. You can actually contribute to both a Traditional and a Roth IRA for the same year. The combined contribution total however cannot exceed the individual limit. For Roth limitations, it is not the deductibility that is limited; it is the amount of the contribution. The full contribution can be made if your AGI is below $101,000 for singles and head of households or $159,000 for joint filers. Once your income exceeds the limit by $10,000, you can no longer contribute to a Roth.
If you recall, contributions to Traditional IRAs permit a deduction, the account grows tax-deferred, and withdrawals come out as taxable income. Where the Roth contribution is considered after tax, so there is no deduction but it still grows tax-deferred and the withdrawals come out income tax-free. Both types of IRA accounts are valuable and can serve an important purpose for your retirement. Your tax advisor or financial advisor should be able to provide guidance as to which solution is best for you.
For those of you who have your own business, in addition to contributing to a personal IRA there are several retirement accounts designed for businesses. The most universal is the SEP. The SEP has a much higher contribution limit than a personal IRA and is based upon the amount of profit reported by the business. There are additional rules for a SEP if those businesses have employees. Looking into this plan as an option can provide a valuable deduction and a significant solution for your retirement needs.
Planning for your retirement should be one of your highest priorities. Benefiting along the way with tax savings is an additional advantage. Retirement based upon Social Security alone will not be sufficient for anyone. Planning ahead is a must, if you expect to get ahead. Contact our office or one of the area financial planners for assistance.
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Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member FINRA, SIPC.