Mark’s Guest Post in the Nashville Chamber Blog

There’s Still Time to Contribute to Your Retirement Account for 2013

by Lindsay Chambers | Mar 10, 2014
Guest post by Mark Deering, CFP®, Southwestern Investment Group, An Independent Firm 

With tax season upon us, you may be looking for last-minute ways to contribute to your retirement savings before filing your taxes. Most individuals choose to save with a traditional IRA (individual retirement account) or a Roth IRA. 

Traditional IRAs and Roth IRAs are not themselves investments, but rather tax-advantaged vehicles in which you can hold your retirement investments. You can open a traditional IRA or Roth IRA with a financial institution such as a bank, mutual fund company, life insurance company or a broker dealer. Once you open an IRA, you or a qualified professional like a Certified Financial Planner™ then need to select the specific investments to fund the IRA. 

Who can contribute? Anyone who has taxable income can open and contribute to an IRA, and certain individuals that earn a taxable income and meet income limitations can open and contribute to a Roth IRA. The amount of your allowable contribution or the deductibility may depend on your annual income and federal income tax filing status. 

What’s the difference? Traditional IRAs and Roth IRAs share a few common generalities. Both feature tax-deferred growth of earnings and allow you to contribute up to $5,500 in 2013 and 2014 of earned income, plus an additional $1,000 “catch-up” contribution if you’re 50 or older. But important differences exist between these two types of IRAs.

A traditional IRA allows anyone with taxable income who is under age 70½ to contribute the maximum $5,500 in 2013 and 2014, plus catch-up if eligible. However, your ability to deduct traditional IRA contributions from your taxes will depend on your annual income, your filing status, and whether you or your spouse has an option to an employer-sponsored retirement plan. Any distribution from a traditional IRA will be subject to income taxes. You may also be subject to a 10 percent early withdrawal penalty if you withdraw money before age 59½ (there are exceptions to this rule). Beginning at age 70½, you must begin to take annual distributions from a traditional IRA. A traditional IRA may work for you if you can make deductible contributions and want to lower your taxes while you’re still working.

With a Roth IRA, no age limitation applies to contributions. However, your ability to contribute and the amount you’ll be able to contribute will depend on your income and tax filing status. Although Roth IRA contributions are not tax-deductible, Roth IRAs have other advantages. You’re not required to take distributions from a Roth IRA at any age, which may provide you with more estate planning options. Additionally, qualified withdrawals will avoid both income tax and the early withdrawal penalty. Non-qualified withdrawals will be taxed and penalized only on the earnings portion of the withdrawal, as the original amount invested (the principal) is your own after-tax money. If you wish to minimize taxes during retirement, a Roth IRA may be your better option.

When can you contribute?
 You can contribute to an IRA or Roth IRA in various increments or in bulk contributions January through April 15 of the following year. For example, you can contribute to your account for 2013 through April 15, 2014.

In Summary This information is not a complete composition of all available saving options available to you, nor is it a recommendation. Your personal goals and circumstances will determine which type of IRA, if any, is right for you. If you are unsure of your best option, you may want to consider seeking the advice of a financial professional, and discuss any tax matters with your tax professional.

If you have a follow-up question or would like to request expert advice from one of our Chamber members on a specific topic, please email us.

Southwestern Investment Group has been a Chamber member since 2004.