Marc A. Hebert's Money Sense: Reasons to make traditional IRAs part of your planning strategy
MARC A. HEBERT
While preparing your income tax return, many of you probably have given some thought to whether or not to make a Traditional IRA contribution. Few people, however, actually take action and do so. According to a TIAA-CREF survey, only 18 percent of Americans are contributing money to an IRA.
An IRA is an important tool in your portfolio to help you save more money for retirement. For each year that you are eligible to make IRA contributions but choose not to, you will lose a chunk of your retirement income. This works because a small amount of savings adds up over time. Here are some compelling reasons why this vehicle can help you plan for your future:
Tax deferral - Traditional IRAs allow your investment earnings to grow tax-deferred until withdrawn, typically at retirement. For 2017 and 2018, the maximum contribution is $5,500, but for those 50 and older the limit is $6,500. You also can't contribute more than the earnings you make through your job or through self-employment. Income from interest, dividends and capital gains alone does not permit a person to contribute to an IRA.
Just make sure to review the contribution rules carefully. For those participating in a retirement plan at work, there are additional rules. Contributions for nonworking spouses are also possible under certain circumstances. Traditional IRAs cannot be funded after age 70½. Other stipulations to watch for are contributing more than your taxable income for the year or contributing on behalf of a deceased individual. Putting in more than the allowed amount can trigger a penalty of 6 percent on the excess.
The contribution limits can change periodically to keep pace with inflation. Be sure to check these before making contributions.
Your tax refund may be directed into your IRA. To direct your refund into only one IRA account, complete the special direct deposit line on your tax return. To directly deposit your refund into multiple IRA accounts, you need to file IRS Form 8888, Allocation of Refund. You can file a tax return claiming a deduction for an IRA deposit before the money is in the account as long as you make the contributions by the April due date of the return. Review the instructions for the form prior to considering this option.
Deductibility - A Traditional IRA contribution is potentially deductible on your income tax return depending on:
. Tax filing status
. Modified adjusted gross income
. Active participation in a retirement plan
Be sure to explore these rules before making your contribution to check that you are entitled to the deduction. The benefit of a Traditional IRA can be twofold - retirement income tomorrow and tax savings today.
Investment flexibility - Of course, what you earn on funds within an IRA isn't guaranteed, but IRAs typically give investors access to a wider range of investment options than workplace-sponsored plans, such as 401(k)s. This flexibility will enable you to structure a portfolio specific to your needs and goals.
Portability - If you have assets in an employer-sponsored plan and you leave your job, you can easily roll over those assets into an IRA. Rolling over your assets can make sense particularly if you change jobs frequently and don't want to devote too much time to coordinating and tracking your accounts.
You have until the due date of your federal income tax return (excluding extensions) to make contributions for the prior year. Contributions for 2017 can be made if you are eligible. Note that making contributions early in the year is often better because the assets have more time to grow.
To learn more about making a Traditional IRA contribution and for specifics unique to your situation, we suggest that you consult your personal tax adviser and/or your financial planner.
Last week's column explored tax credits that can reduce a family's income tax burden. Keep in mind that information applies to 2017 and the tax returns due in April. Some of the tax credits referenced have changed under the new tax laws that take effect this year.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at email@example.com. Your question and his response might appear in a future column.