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Explore IRA options today, save for tomorrow

By Gail Kinsella

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Recently, I found myself in conversation with family friends who are at a number of crossroads. One child recently purchased a home, one child is moving off to a full-time professional placement, and yet another is heading to college after having finished a summer of part-time employment. While each of these paths carries distinct differences, all share a common thread — the need to plan for retirement.

While it may seem odd to have this conversation with the college-bound member of your family, it is actually the perfect moment in time. Another friend agrees and went so far as to match her son’s income with an IRA deposit. And in doing so, served up an explanation on how important it is to save for retirement starting right now. That family’s plan, by the way, is to continue the matching program through the student’s college years to help jump-start the nest egg of the future.

In the scenario of the first family I mentioned, the eldest child was quite verbal about the importance of saving, but confessed to being somewhat confused about the options available, even after investing some time reading up on the subject. I suspect this is a concern shared by many.

Any time your employer offers a salary-deferral program, and many do, you should jump right on the bandwagon. While the best plan is to make the maximum deferral allowed by law (and reduce your taxable income, thereby saving tax dollars), it is very important to defer any amount your employer will match. For those not deferring the maximum paycheck, it is a very good idea to consider the old adage, “you don’t miss what you never had.” So, catch up those contributions whenever receiving a bonus or pay increase.

For those with no access to an employer plan, the IRA is an option. There are traditional IRAs and Roth IRAs. And to make matters more complicated, traditional IRAs may receive both deductible and non-deductible contributions. The long and short of it? If you have earned compensation, you should be looking at IRA options.

Both Roth and traditional IRAs carry contribution limits, which are subject to cost-of-living adjustments of $5,500 for 2014 with the additional catch-up option for individuals who will be at least age 50 by the end of the year. In any case, contributions cannot exceed your annual compensation. For example, if your W-2 reflects taxable income of $3,700, then the IRA contribution is limited to $3,700.

Traditional IRA contributions are deductible on your federal income-tax return depending on your marital and tax-filing status, whether you or your spouse participate in an employer-sponsored retirement plan and your modified adjusted gross income.

Roth IRA contributions are not tax-deductible, but you can withdraw your contributions at any time, tax and penalty free. When you satisfy the qualified distribution requirements, you can withdraw earnings tax-free. In my view, this is the ultimate reward for utilizing a Roth IRA.

Both traditional and Roth IRAs have the benefit of tax-deferred earnings within the IRA. Earnings within the traditional IRA are taxable upon withdrawal, but Roth earnings may be eligible for tax-free withdrawal in certain circumstances.

In case things weren’t complicated enough, the discussion of traditional vs. Roth moves to a whole new level when you consider IRA conversions and the fact that you may be able to make a contribution to more than one type of retirement account, IRA or employer-sponsored, in any given year. There are a number of limitations, the first of which is that the total amount deposited in any type of IRA for a given calendar may not exceed your annual compensation in total. In addition, there are deductibility rules for traditional IRAs based upon filing status, amount of modified adjusted gross income, and qualified plan participation.

You have probably heard about IRA conversions. A conversion occurs when traditional IRA assets are moved into a Roth IRA. It is important to remember that any pretax or deductible part of your traditional IRA that is converted to a Roth IRA must be included in your taxable income for the year in which the conversion takes place. Sometimes this makes sense, particularly when you consider the long-term value of tax-deferred earnings within the Roth IRA.

Last but not least is the added benefit of making a retirement-plan contribution in terms of the saver’s tax credit you may be able to claim on your tax return when contributing to a retirement account. Pay special attention to this — many people do not consider this when making the “can I afford it?” decision. The bottom line? Can you really afford not to leverage retirement-plan savings to the greatest extent possible?

There are numerous charts and websites available to assist you in determining what contribution is allowed and what amount of the contribution is deductible, but a call to your CPA can help you sort through the details and the particulars of your personal situation. It isn’t too late to get the ball rolling for this year.

Gail Kinsella is a partner in the accounting firm of Testone, Marshall & Discenza, LLP. Contact Kinsella at gkinsella@tmdcpas.com

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