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Find Hidden IRA Savings

from CNN Money – by Donna Rosato –

Tax day is fast approaching, and with it the deadline for one of the best opportunities to juice your retirement savings and cut your tax bill: an individual retirement account.

Unlike most tax breaks, which expire at the end of the tax year, you have until midnight on April 15 to make a 2013 IRA contribution — of up to $5,500, or $6,500 if you’re 50-plus.

Already putting money in? Pat yourself on the back: Only 15% of households saved in an IRA last year, according to the Investment Company Institute. But you may be missing opportunities to sock away even more. And if you’re not participating because you think your income doesn’t allow it? There’s a workaround for that too, which you ought to consider.

As you may know, contributions to a traditional IRA are fully deductible up to certain income limits — for 2013, $59,000 in modified adjusted gross income for single folks and $95,000 for couples filing jointly. With a Roth — eligibility for which starts phasing out at $178,000 for couples in 2013 — you get no write-off upfront, but get to withdraw funds tax-free in retirement.

In both types, your money grows without the drag of taxes. Maximize these benefits with the tactics that follow, but you may want to hurry. Time’s running out to reduce your 2013 bill.

Save for a spouse

While the IRS says you must have earned income to stash cash in an IRA, there’s one exception: You can put money in on a spouse’s behalf if he or she has no income, so long as you file jointly. “The IRS doesn’t want to penalize a spouse for not working,” says Adam Glassberg, a financial planner in the Chicago area.

A spousal IRA can be either traditional or Roth, with the same contribution allowances. One big, important difference is that contributions made to a traditional spousal IRA are fully deductible up to a higher income — $178,000 in modified adjusted gross — than for joint filers who both have access to a 401(k). Assuming you qualify for that deduction, a $5,500 contribution will shave $1,540 off your 2013 taxes if you’re in the 28% tax bracket.

Stash self-employment income

Do you work for yourself? Or did you do a freelance gig or two on the side last year? The savings opportunity is especially good for you.

You can contribute as much as 25% of net self-employment earnings, up to $51,000 for 2013, to a simplified employee pension plan, or SEP IRA. That’s in addition to the $5,500 you can put in a traditional or Roth IRA, plus the $17,500 you can put in a 401(k) if you have one through a primary occupation. So it’s an especially worthwhile strategy for moonlighters who are already maxing out a workplace retirement plan. Plus, SEP contributions are fully deductible.

“It’s a really valuable way to save and reduce your taxes,” says Newport Beach, Calif., financial planner Dan Thomas.

Use the back door to a Roth

Even if you make too much to write off a traditional IRA contribution, you’re still eligible to stash money in such an account. Without the deduction, a traditional IRA can lag behind a brokerage account invested in index funds or other tax-efficient holdings. But you may still have good reason to open one: A nondeductible IRA allows you to sidestep your way into a Roth if you wouldn’t otherwise be eligible based on income.

You can convert a traditional IRA to a Roth at any time, no matter your AGI. Assuming you have no other IRAs and shift over the funds immediately — before you have gains — you won’t owe any taxes. (If you do have any existing deductible IRA savings, you will owe prorated tax based on the total balance, to essentially pay back the write-off you took upfront.)

Moving to a Roth can be especially beneficial if you think your tax bracket will be the same or higher in retirement. Unfortunately, this strategy won’t help you fend off Uncle Sam this month, but you might be quite thankful 20 years down the road.

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Alice

It slays me how the author can talk about socking and stashing away all kinds of cash from earnings. I would like to know how many people actually have the kind of money he is talking about. God provides for us. We are able to live comfortably, but we do not have the thousands that the article is talking about. At age 68 and 70 we still have to be very mindful of what we spend in order to make ends meet, and still be able to give back to the Lord what is rightfully His.

Kelly Ann Hearn

I am 50 & have never invested. I know, its shocking. But its nit too late to learn I hope? What is the best way for me to learn about IRA, CD, STOCK etc? Then I could mentor my children also.

Loy G. Wilson

Very good article! FOR ECONOMIS TO BE TAUGHT IN COLLEGE IS TOO LATE! IT SHOULD BE TAUGHT IN HIGH SCHOOL Look at the millions of people that do not go to College.
To understand economics is to understand capitalism (people controlled economy) and not socialism (government controlled economy).
Capitalism built our great nation but solialism is now destroying it.

Regina Alongi

Great article; so true. They should teach basic finance and economics in college to all so everyone can set aside savings and be in a good position without worrying about Social Security when they get older. We need basic financial education to take top billing.

PaulE

A very useful and practical article for not only seniors to read, but everyone in general. Financial literacy is woefully lacking in the overall population, given the fact that there is ZERO emphasis on it in public education before college. Even then, most of the courses taught today in most colleges are either centered around promoting the highly flawed economic theories of John Keynes or the anti-capitalistic rants of professors espousing Marxism / Socialism. None of which of course does anything to promote true financial literacy that would benefit the citizens of this country. Given the dismal savings rate we have in this country, that I believe is a direct result of the lack of proper economic and financial education being a core part of the public education system, a series of articles like this would seem to be reasonable way to improve the ability of people of all ages… Read more »