Most state taxes can't be completed until the federal 1040 is done.(Photo: Thinkstock)
Tax documents for 2012 are beginning to arrive in the mail, and one of the
easiest deductions for qualified taxpayers is a contribution to an IRA or
individual retirement account.
This is a great move for many Americans for four main reasons:
-- It can substantially reduce your taxable income: The limit is a
$5,000 contribution to an IRA, or up to $6,000 if you're 50 or older. That's a
big chunk of change to take out of your tax burden.
-- If you have no 401(k), you need to start planning: The vast
majority of Americans are dramatically behind schedule on their retirement
planning. Nearly half aren't saving a penny for retirement, according to recent
surveys. If that describes you, then the tax write-off is nice, but the ability
to pay the bills when you're in your 80s is an even better benefit.
-- IRAs are flexible: With IRAs, you can choose from a much wider
array of investments via ETFs and even individual stocks. True, a lot of folks
aren't sophisticated enough to gamble on stock-picking. But in vehicles such as
a 401(k), you often are roped into a small group of funds and can't shop around
to keep your fees low -- a simple but crucial part of any successful retirement
-- You still have time: You can make your IRA contribution (and write
it off) right up until tax day in April and still apply it to 2012. If you
missed certain tax moves before Jan. 1, such as donating to charity, you can
take the IRA deduction on your upcoming returns, as long as you do so before the
filing deadline. Tax day is April 15.
If you currently have no retirement plan, this is a no-brainer. Single and
head-of- household filers have no income limit if an IRA is their only
retirement vehicle, nor do married couples filing jointly - presuming neither
spouse has an employee-sponsored plan.
If you're 50 and older, you can deduct an extra $1,000, for a total of
$6,000. That's not only a great way to reduce your taxable income, but a way to
catch up on savings if you're only a few years from retirement.
Who misses out?
There are a few specific instances in which an IRA doesn't make sense, at
least from a tax-deduction perspective.
-- Married, filing separately. The IRS only offers a partial deduction
- and then, only if you file with less than $10,000 in adjusted gross income.
That's a very low ceiling.
-- Married, making more than $183,000. Married couples filing jointly
can take the $5,000 deduction if they make under $173,000 total, and a partial
deduction if they make $173,000 to $183,000. But if your household brings in
more than $183,000, you're out of luck.
-- Those who already have an employee-sponsored retirement plan. If
you have a 401(k) through work, the IRS isn't interested in giving you a tax
break to entice you to save, because you're doing it already, so the gross
income threshold is significantly lower for folks with an employee-sponsored
retirement plan. Single folks making more than $68,000 get no deduction, and
married couples filing jointly who make more than $112,000 get no deduction,
Check out the IRS website for specifics on deductions, at: http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits.
Jeff Reeves is the editor of InvestorPlace.com and the author of The
Frugal Investor's Guide to Finding Great Stocks.
Jeff Reeves, Special for USA TODAY