Massachusetts Bankers Association
FOR IMMEDIATE RELEASE Contact: Bruce Spitzer
617-523-7595
TAX AND RETIREMENT SAVINGS TIPS FROM THE MASSACHUSETTS BANKERS ASSOCIATION
BOSTON, April 7, 2010 – Tax time can be less stressful when you consider that there are several opportunities to reduce your tax burden and save for retirement at the same time. The Massachusetts Bankers Association is suggesting a few tax and retirement-planning tips to help consumers save time and money.
You still have time to contribute to an IRA for the year 2009 to reduce your taxable income and contribute funds toward your retirement. Contact your local bank for assistance. The deadline for investing is your tax return due date, April 15. Be sure to tell the bank that the contribution is for 2009. Otherwise, the funds could be applied to 2010.
“We know it’s a challenge to think about putting money in an IRA during tough economic times,” said Daniel J. Forte, president of the Massachusetts Bankers Association. “But if you’re in a position to do so, you’ll be glad you did come retirement. And it’s never a bad idea to reduce your tax burden, which an IRA may do immediately.”
The benefits of investing in an IRA may include:
1) A Tax Deduction: On certain traditional IRA contributions;
2) Tax-deferred Earnings: Earnings can accumulate and compound;
3) Tax-Free Distributions: Only on some distributions of Roth IRA;
Generally, you can contribute up to $5,000 of your earnings for 2009 or up to $6,000 if you are age 50 or older. You can fund a traditional IRA, a Roth IRA (if you qualify under the income limits) or both, but your total contributions cannot be more than these amounts.
A few more details:
Traditional IRA Roth IRA
Timing Fund up to tax deadline of this year for the previous year Fund up to tax deadline of this year for the previous year
Requirements Adjusted Gross Income (AGI) is unlimited if you or your spouse is not an active participant in an employer sponsored retirement plan. No contributions if age 70½ or older.
If you are an active participant in an employer plan, phase-out rules apply:
• Married filing jointly:
- $89,000 - $109,000
• Single, Head of Household:
- $55,000 - $65,000
If you are not covered but your spouse is covered by a qualified retirement plan the phase out is as follows:
• Married filing jointly:
- $166,000 - $176,000 AGI must be within the following:
• Single Filers:
- AGI must be under $120,000
- Partial contribution if AGI is between $105,000 - $120,000
• Married filing jointly:
- AGI must be under $176,000
- Partial contribution if AGI is between $166,000 - $176,000
Rollovers and Conversions IRA funds may be rolled into another IRA tax-free
All or part may be converted to a Roth IRA.
Taxes are owed on pre-tax amounts converted.
No penalty owed for conversion if taxes paid out-of-pocket.
One Roth IRA may be rolled over tax-free to another Roth IRA
In 2009, conversion from traditional IRA allowed if AGI is $100,000 or less.
Deductions Yes, if neither you nor your spouse is covered by a qualified retirement plan.
Yes, if AGI is under IRS defined limits noted above and you or your spouse is covered by a qualified retirement plan.
No, if AGI is over IRS defined limits and you or your spouse is covered by a qualified retirement plan.
If AGI is over the IRS limits, you may make a non-deductible contribution but it may be more advantageous to contribute to a Roth IRA instead if you do not exceed those AGI limits. None allowed.
Distributions Earnings and deductible contributions are fully taxable.
Only earnings portion of non-deductible contributions is taxable
Prior to age 59½ are subject to a 10 percent penalty unless an exception applies.
Exceptions include First Time Home Purchase, Higher Education expenses and others. Qualified distributions are tax free.
Contributions are distributed tax- and penalty-free even if non-qualified.
Distributions of earnings before the end of the five year waiting period are exposed to income tax and a 10% penalty.
Distributions of conversion amounts before the end of the five year waiting period are subject to a 10% penalty
Distributions made five years after the opening of the account are considered qualified for the following:
• Permanent and total disability
• Attaining the age of 59 ½
• First Time Home Purchase
Distributions for higher education expenses are allowed.
Required Distributions Distributions generally required for age 70½ and beyond. However, 2009 required distributions were waived. No required distributions for the Roth IRA owner.
More points to consider:
• If you are starting an IRA, you must do it by visiting a qualified financial institution—you cannot do it online.
• If you earn more than the IRA limits for tax deduction purposes, an IRA investment is still worthwhile. You may still find it a good investment because the accumulated gains are not taxable until you withdraw the funds.
• If you have reached the contribution limits for a deductible contribution, still consider adding more. In 2010 you can convert all categories of funds, deductible and nondeductible, to a tax free Roth IRA because the income limits will be eliminated.
• If you do convert your regular IRA to a Roth IRA in 2010, you may report the full amount as taxable income in 2010 or you may defer the income and report it one-half in 2011 and one-half in 2012.
• With so many American servicemen and women overseas, it is worth noting that combat pay that was non-taxed can be counted as income for making an IRA contribution going back to 2004.
• Certain qualified transfers from IRAs may be made tax-free to health savings accounts (one transfer per lifetime).
• Have you inherited a non-spouse employee’s IRA or a qualified plan? There is some good news for you: you can make a trustee to trustee transfer to a newly created “inherited IRA,” and pay taxes on distributions over your lifetime, allowing you to accrue more earnings and avoid an up-front tax burden.
• Be sure to keep records of any Roth IRA contributions or conversions. It is critical if you take an “early” distribution from your Roth IRA.
• Consider paying any IRA fees with funds outside of your IRA to avoid depleting the retirement funds.
• An IRA cannot be put into a trust; a trust can only be the beneficiary.
Other Retirement Accounts:
• If you or your spouse is covered by a pension plan, your ability to make a traditional IRA contribution may be reduced or eliminated. For example, if you are covered by a pension plan, you will not be able to make an IRA contribution and still receive the tax deduction if your AGI exceeds $109,000 (assuming you file a joint return). However, if AGI is under $176,000, both work, and one of the spouses is not in an employee-sponsored retirement plan, many times this becomes a missed opportunity. The spouse not in an employee plan is eligible to invest in a deductible IRA.
• Make a point to utilize the new higher limits for your 401(k), 403(b) or 457 plan. For 2009 you can invest up to $16,500. Employees age 50 and older can contribute up to $22,000 in any of these defined contribution plans in 2009.
• For 2009, if you are self-employed, you can now put up to $11,500 in a Simple IRA, ($14,000 if 50 years of age or older). Also, as a self-employed person with a 401(k) plan and no other employees, you can make an elective deferral of up to $16,500 ($22,000 if age 50 or older) as well as an “employer contribution” of up to 20 percent of earned income. The combined elective deferral and employer contribution cannot exceed the lesser of 100 percent of your compensation or $49,000 ($54,500 if age 50 or older).
More Help and Tax Forms
These rules can get complicated and we have covered only the basics here. The benefits of IRA participation are many, however, and if you are interested in learning more, seek help from the IRS, the Massachusetts Department of Revenue or your local bank. Tax forms can be picked up at your local bank, post office or library. Additional forms and information can be obtained from the Internal Revenue Service Web site www.irs.gov or the Massachusetts Department of Revenue Web site www.dor.state.ma.us.
The Massachusetts Bankers Association represents approximately 200 commercial, savings and co-operative banks and savings and loan institutions in Massachusetts and elsewhere in New England.
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Massachusetts Bankers Association, Inc.
One Washington Mall, 8th Floor
Boston, MA 02108-2603
Tel: 617-523-7595 / Fax: 617-523-6373
http://www.massbankers.org