Last-Minute Tax Savings

Ed Slott & Company

Can a traditional IRA contribution help reduce your tax liability?

Posted March 25, 2011

By Ed Slott & Company

With the April 18th filing deadline for 2010 returns (the deadline is extended 3 days due to a D.C. holiday) just around the corner, many of you might be looking for any last-minute tax tips to help reduce your taxes for 2010 and in the future.

In general, there aren’t too many things you can do after a year is over that affect your taxes for a previous year, but thankfully, one of those things is a traditional IRA contribution. Traditional IRA contributions may still be made for 2010 as long as they are postmarked by April 18, 2011 (the filing deadline for 2010 returns). Roth IRA contributions may also be made until the same date, and while they won’t reduce your tax liability in 2010, these contributions can help to provide tax benefits (in the form of tax-free income) in future years.

Thinking that a traditional or Roth IRA contribution may be right for you? Then check out the information below to make sure you qualify. Contributions that are not allowed could land you a 6% penalty for each year they remain in the account.

Traditional IRA Contributions

Minimum Age Limit—There is no minimum age limit to make a traditional IRA contribution.

Maximum Age Limit—Traditional IRA contributions may be made for any year in which you are under 70½. If you turn 70½ or older in a calendar year, you may NOT make a traditional IRA contribution.

Minimum Income—You must have earned income to make a contribution to a traditional IRA. Earned income is generally either wages or self-employment income. If you have earned income, you may contribute the lesser of your earned income for 2010 or the maximum contribution limit (see below).

Maximum Income—There is no income limit on who can make a traditional IRA contribution. If you made 1 billion dollars last year, your may still make an IRA contribution.

Contribution Limit—The IRA contribution limit for 2010 was $5,000. If you were age 50 or over by the end of 2010 then an additional $1,000 catch-up contribution is allowed for a total of $6,000. The $5,000 ($6,000 if 50 or over) contribution limit is a combined limit for traditional and Roth IRA contributions.

Deductibility of Contribution—If you (and if married, your spouse) were not an active participant in a company plan (i.e. 401(k), 403(b), SEP IRA) during 2010, you can make a completely deductible contribution to your traditional IRA regardless of your income. If you or a spouse were an active participant in a company plan however, then depending on your income the contribution may not be deductible. IRS Publication 590 has a chart that you can reference to determine how much, if any, of your traditional IRA contribution for 2010 will be deductible if you or your spouse actively participated in a plan.

Roth IRA Contributions

Minimum Age Limit—There is no minimum age limit to make a Roth IRA contribution.

Maximum Age Limit—There is no maximum age limit for Roth IRA contributions.

Minimum Income—Like a traditional IRA, you must have earned income to make a contribution to a Roth IRA. If you have earned income, you may contribute the lesser of your earned income for 2010 or the maximum contribution limit (see below).

Maximum Income—Although there is no income limit on making a Roth conversion, there are limits on Roth contributions. For 2010, the eligibility of single filers to make Roth contributions was phased out between $105,000 and $120,000 and for those who were married and file joint returns between $167,000 and $177,000.

Contribution Limit—The Roth IRA contribution limit for 2010 was $5,000. If you were age 50 or over by the end of 2010 then an additional $1,000 catch-up contribution is allowed for a total of $6,000. The $5,000 ($6,000 if 50 or over) contribution limit is a combined limit for Roth IRA and traditional IRA contributions. Contributions in excess of the limit are treated as made first to a traditional IRA.

Deductibility of Contribution—Contributions to a Roth IRA are never deductible, but the distributions from these accounts are generally income tax-free in retirement (provided you meet certain criteria).

Ed Slott and Company has been called "The Best" source for IRA advice by The Wall Street Journal, and "America's IRA Experts" by Mutual Funds Magazine. Ed is a widely recognized professional speaker and author. Get more IRA information from America's IRA Experts.