Still time for 2011 IRA contribution

Staff Writer
Woodford Times

“If you think it’s too late to do anything that will reduce your income taxes for 2011, think again,” advises Karen Chan, CFP, Consumer Economics Educator with University of Illinois Extension.

Contributing to an IRA is one of the few things for which the IRS gives a grace period.  This year, taxpayers have until April 17 to put money into an IRA and label it as a contribution for 2011.  Most tax filers can deduct traditional IRA contributions from their income, reducing the amount of tax they owe.

Taxpayers can contribute up to $5,000, or the amount of your earned income if taxpayers earned less than $5,000. Non-working taxpayers can make a contribution based on a spouse’s earned income. Alimony also counts.

A $5,000 contribution will save $1,500 in taxes if in the 25 percent federal and 5 percent state income tax brackets.  A married couple could save twice that amount by funding an IRA for each spouse.

“Age makes a difference,” said Chan.

If you were 50 or older by the end of 2011, you can contribute an additional $1,000, making your limit $6,000. But if you were 70 1/2 or older at the end of 2011, you can no longer contribute to a traditional IRA.

Taxpayers can deduct their entire contribution unless they are an active participant in an employer retirement plan. Check the W-2 to see if Box 13 – Retirement Plan is checked. If so, the taxpayer is an active participant. Even then, the taxpayer can deduct the full amount of the contribution if the adjusted gross income (AGI) is less than $56,000 for single filers or $90,000 for married persons filing jointly.

Above those income limits, the amount that  can be deducted is phased out. Once income reaches $66,000 for single filers or $110,000 for married filers, the taxpayer cannot take a deduction.

If the taxpayer can’t deduct a contribution to a traditional IRA, or isn’t eligible because they’re 70 1/2 or older, a Roth IRA may be the solution. They won’t save any taxes this year with a Roth IRA, but all the growth in the account can be taken out tax-free once they’ve had a Roth IRA for at least five years and they’re age 59 1/2 or older. The$5,000 contribution limit is reduced for singles with AGI between $107,000 and $122,000 and married filing jointly between $169,000 and $179,000.

Taxpayers can contribute to both a traditional IRA and a Roth IRA in the same year, but the combined contributions cannot be more than $5,000, or $6,000 for those aged 50 or older.

“If you want to contribute more, why not go ahead and make your contribution for 2012,” said Chan.  

Wages, salary, commissions, tips, bonuses, and profit from self-employment all count as earned income.

For more about traditional and Roth IRAs, check “IRA Basics” at