There’s Still Time to Contribute to an IRA for 2012
There’s still time to make a regular IRA contribution for 2012! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2012 ($6,000 if you were age 50 by December 31, 2012). For most taxpayers, the contribution deadline for 2012 is April 15, 2013.
You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit. You may also be able to contribute to an IRA for your spouse for 2012, even if your spouse didn’t have any 2012 income.
Traditional IRA
You can contribute to a traditional IRA for 2012 if you had taxable compensation and you were not age 70½ by December 31, 2012. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2012, then your ability to deduct your contributions may be limited or eliminated depending on your filing status and your modified adjusted gross income (MAGI) (see table below). Even if you can’t deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you’re eligible, you’ll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.
2012 income phaseout ranges for determining deductibility of traditional IRA contributions:
1. Covered by an employer-sponsored plan and filing as:
a. Your IRA deduction is reduced if your MAGI is:
Single/Head of household: $58,000 to $68,000
Married filing jointly: $92,000 to $112,000
Married filing separately: $0 to $10,000
b. Your IRA deduction is eliminated if your MAGI is:
Single/Head of household: $68,000 or more
Married filing jointly$112,000 or more
Married filing separately: $10,000 or more
2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan
a. Your IRA deduction is reduced if your MAGI is: $173,000 to $183,000
b. Your IRA deduction is eliminated if your MAGI is: $183,000 or more
Roth IRA
You can contribute to a Roth IRA if your MAGI is within certain dollar limits (even if you’re 70½ or older).
For 2012, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $110,000 or less. Your maximum contribution is phased out if your income is between $110,000 and $125,000, and you can’t contribute at all if your income is $125,000 or more.
Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $173,000 or less. Your contribution is phased out if your income is between $173,000 and $183,000, and you can’t contribute at all if your income is $183,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.
Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. If you haven’t yet reached age 70½, you can simply make a nondeductible contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own–other than IRAs you’ve inherited–when you calculate the taxable portion of your conversion.
Finally, keep in mind that if you make a contribution to a Roth IRA for 2012–no matter how small–by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2012.
A financial plan is essential for you to know how to invest your money.
To over simplify, financial planning is how you manage your finances and establish a path to reaching your goals. Investment management is one part of managing your finances. It is the part that determines how your savings will be invested.
Financial planning starts with your goals. The amount and timing are critical. Prioritizing your financial goals is necessary. You can assign a priority of 1 to 10 or categorize your goals by what is needed, what is wanted and what is wished for. This will be essential as you monitor your progress. Life and unanticipated events are not controllable and may require adjustments. Adjustments may result in changes to your goals, the timing of your goals, or your spending.
A reserve fund is needed to absorb unexpected events. Reserves should be held so that they are quickly assessable, that is, liquid. Six months of reserve are generally recommended. As you approach each goal, the reserve fund should be increased. This will avoid the impact of fluctuating investment values when the funds are needed. The amount of liquid assets should be increased as you near retirement. This minimizes the need to sell investments when the market is depressed. Two years of liquid funds are generally recommended for retirees. A portion of the funds for living expenses in retirement might be held in short-term bond funds or bonds.
Investments are purchased with the amount of your savings that exceed your reserves. The amount that is used for investments must be sufficient to reach your goals. Education expenses and health care are two categories of expenses that have exceeded what people anticipated. Many people underestimate the amount they will need in retirement. Because life expectancy has increased and people have retired early, many people will not be able meet their retirement goals.
The planning process needs to consider the above events and your ability to withstand losses.
The above has touched on cash planning, investment planning, education planning, risk assessment and retirement planning. All the planning areas need to fit together. How you manage your investments is dependent on the other areas of your financial plan.
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Did you realize how much you could have learned from “Downton Abbey”?
Kelly Greene’s March 1st article outlined some of the lessons from the British drama.
The timing and occurrence of future events require advanced planning. The planning should include: who should get the assets, the management of the assets and how the assets should be used.
Keeping the family informed of one’s intention is important. This is especially true for non-traditional and blended families. The importance of medical directives was vividly demonstrated in the series.
Providing for family members and business associates in the event of incapacity or death is evident from the events portrayed in this TV drama. Trusts, wills, powers of attorney and other agreements will see that the financial assets are used as intended. Well drafted documents will provide for how the assets will be used and managed. Experienced professionals can draft the documents to provide for the control of the assets and the flexibility in the case of future conflicts.
Change happens in life. We need to monitor what is happening. In the show an investment loss illustrated the importance of monitoring investments, the need for investment diversification and the need to change.
Involving the family early in the process can be very beneficial. This helps avoid misunderstandings and provides a mechanism for implementing the plan.