It's Not Too Late to Contribute to Your IRA

It's Not Too Late to Contribute to Your IRA for 2012

By Tom Copeland. Published with permission.

One of the biggest tax breaks available to family child care providers is the Individual Retirement Account (IRA).

When you put money into an IRA for 2012 it will reduce your 2012 taxable income. You won't have to pay tax on it (along with the interest you earned) until you withdraw it after age 59 1/2. 

By not having to pay tax on your contributions and interest for many years your money will accumulate much faster than if you invested outside an IRA. For more on the tax benefits of IRAs, see my article.

Note: a ROTH IRA works differently than all other IRAs. You won't get an immediate tax deduction when you make your contributions, but you won't pay any tax on the contributions and the interest earned when you withdraw them.

In general, you will be better off contributing to a Roth IRA than a Traditional IRA. See more.

The deadline for making a contribution to your IRA for 2012 is April 15, 2013. You can both establish and contribute to your 2012 IRA by this date (see exception for a SIMPLE IRA below).

Family child care providers may be eligible to contribute to the following IRAs:

Traditional IRA: If you are single you are eligible to contribute. If you are married and filing jointly and your spouse is not covered by a retirement plan at work, you are eligible to contribute if your family's adjusted gross income (AGI) is less than $183,000 ($188,000 for 2013). If your spouse is covered by a retirement plan at work, you are eligible to contribute if you family's AGI is less than $112,000 ($115,000 for 2013).

Maximum contribution - $5,000 per person ($5,500 for 2013); an extra $1,000 if you are age 50 or older.

Roth IRA: If you are single you are eligible to contribute if your profit is less than $125,000 ($127,000 for 2013). If you are married and filing jointly, you are eligible to contribute if your family's AGI is less than $183,000 ($188,000 for 2012).
Maximum contribution - $5,000 per person ($5,500 for 2013); an extra $1,000 if you are age 50 or older.

SIMPLE IRA: You are eligible to contribute whether you are single or married and regardless of your family's income.
Maximum contribution - $11,500 of your profit ($12,000 for 2013); plus an extra $2,500 if you are age 50 or older.
Note: To contribute to a SIMPLE IRA for 2012 you must have established it by October 1, 2012.

SEP IRA: You are eligible to contribute whether you are single or married and regardless of your family's income.
Maximum contribution - 18.59% of your profit.

Additional Rules

You don't have to contribute the maximum contribution to establish an IRA. You can contribute less than the maximum in subsequent years.

You cannot contribute more than a total of $5,000 ($5,000) each year to both a Traditional IRA and Roth IRA. You could contribute $2,000 to a Roth IRA and $3,000 to a Traditional IRA in one year, but not $4,000 to a Roth IRA and $3,000 to a Traditional IRA.

You can contribute the maximum to either a Roth or Traditional IRA and the maximum to a SIMPLE or SEP IRA. You can't contribute to both a SIMPLE IRA and SEP IRA in the same year.

Although many child care providers contribute to their IRA after the tax year is over, it's always a better idea to contribute early in the tax year to get the maximum interest over time. So, plan to make your 2013 IRA contributions now!

Tom Copeland - www.tomcopelandblog.com

 

Image credit: firstbankmiami.com

For more information about IRAs, see my book Family Child Care Money Management & Retirement Guide.

Posted by Tom Copeland at 10:46 AM in Money Management & Retirement | Permalink