It’s that time again – Uncle Sam wants his money and smart investors are looking for ways to reduce their tax burden.
One of the simplest ways is to contribute money to your retirement. If you are self-employed, you may be able to deduct up to $53, 000 from your 2015 Earned Income and then use that money to fund your retirement. The best part? In most cases, you can take that contribution straight off your taxable income – it might even drop you a tax bracket.
The deadline for contributions is April 15, 2016. The earlier you make your contribution the better. If something happens and your contribution gets delayed for whatever reason the IRS couldn’t care less. They’ll tax you on that money. Give yourself time for the unexpected and get your contribution in as soon as possible.
a. Under 50 — $5500
b. Over 50 — $6500
c. Remember to report your contribution – it’s a deduction UNLESS you have contributed to a 401k for 2014 in which case you may not be able to deduct your IRA contribution. Check with your tax professional and/or 401k plan administrator.
d. You cannot contribute to an IRA if you do not have earned income.
e. If you are over 70 ½ you cannot make a contribution to a Traditional IRA.
a. Income limits as follows;
i. Single tax filers: Up to $115,999 in Modified Adjusted Gross Income. Partial contributions possible between $116,000 – $130,999.
ii. Joint tax filers: Up to $182, 999 in Modified Adjusted Gross Income. Partial contributions possible between $183,000 – $193,000.
b. Your contribution is not a deduction.
c. You can contribute to a ROTH IRA at any age, provided you have earned income, meet the income limits, and are not disqualified due to already funding a traditional IRA for the period.
SEP IRA (Self Employed)
a. 0 – 25% of your compensation up to $53,000.
b. Must be a sole proprietor, partnership, business owner or earn and report self employed income.
c. Eligible employees must receive the same percentage contribution.
d. Remember to report your contribution – generally SEP IRA contributions come off your Earned Income total on a dollar for dollar basis, so you might drop a tax bracket. Check with your tax professional.
You can contribute to an IRA subject to the above restrictions even if you have already contributed or maxed out your 401k for 2015.
ROTH vs. Traditional?
This is pretty simple. If you qualify and don’t need (or don’t qualify for) the tax deduction, put the money in the ROTH. Why? Qualified ROTH withdrawals are tax free. Traditional IRA withdrawals, even if made after 59 1/2, are subject to income taxes. Bet on that being a bigger and bigger bite of your retirement funds as time passes.
Just a reminder that these are guidelines – neither my firm nor I are qualified tax professionals and therefore do not provide tax advice. Check with your tax professional.
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To Smarter Investing,
Chief Market Strategist
ACI Wealth Advisors, LLC
Process Portfolios, LLC