Tax Savings Opportunities During the IRA Season

Can You Benefit From Contributing to a Traditional IRA, Roth IRA, or Both?

December 2011

The 2011 extended IRA season – from January through April 17, 2012, may offer you opportunities to cut taxes and enhance your estate planning. In this article, TIAA-CREF tax planners Doug Rothermich, J.D., and John O’Shea, J.D., answer frequently asked questions on IRAs and share their thoughts regarding the current IRA season.

1. Why do many financial providers, like TIAA-CREF, emphasize IRAs each year beginning in January?
Most people begin to receive their important income tax papers (e.g., W-2 and 1099 forms), in January and, as a result, start to think about ways of reducing the amount of federal, and possibly state, income tax owed on or before April 17, 2012. (Note: The 2011 tax return filing deadline has been extended to April 17, 2012.) With that in mind, most taxpayers can receive an up-front income tax deduction on contributions to a Traditional IRA. You can contribute up to $5,000 ($6,000 if age 50 or over) of earned income each year. During the time frame of January through April 17, you can contribute for both 2011 and 2012 – a total of $10,000 ($12,000 if age 50 or over). Any earnings from your contributions grow on a tax-deferred basis until you tap into those funds in retirement.

2. Are you saying that I can contribute to a Traditional IRA in 2012 and deduct the amount against 2011 income?
Yes. If you contribute to a Traditional IRA between January 1 and April 17, you have the option of treating the amount as a contribution for 2011 or 2012. If you don’t specify which year, the financial provider typically reports the contribution for the current year.

3. What if I already filed my income tax return (e.g., in February), then learn about this strategy later, and decide to make an IRA contribution in March for the previous year?
You can still treat the contribution as a 2011 contribution. Generally, you must contribute by the due date of the federal income tax return, not including extensions, which is April 17 for individual taxpayers. In this case, you would file an amended 2011 federal income tax return to claim the deduction and request a refund.

4. How does the up-front income tax deduction work?
Anyone with earned income who is under age 70½ is eligible to contribute to a Traditional IRA, but the question is whether you can deduct the contributed amount against taxable income. The rules for deductibility vary, depending upon your marital status and income level, referred to as adjusted gross income (AGI).

5. What if my AGI is above the threshold for receiving an income tax deduction?
You can still contribute up to $5,000 each year to a Traditional IRA ($6,000 if age 50 or over). There are two benefits to this strategy. First, even though the initial contribution is not tax deductible, the investment earnings can still accumulate tax-deferred until withdrawal. Second, the IRA typically has some creditor protection attributes at the federal and at most state levels, making it particularly attractive to physicians and other professionals who are looking for investments with creditor protection attributes, because of the high risk for professional liability.

Another option is to explore the merits of a Roth IRA. The Roth IRA uses an AGI threshold for who is eligible to contribute that is substantially higher than what applies for eligibility for tax deduction with a Traditional IRA. Roth IRA contributions can be made at any age, even after age 70½. And, the contribution amount is the same as with a Traditional IRA - $5,000 ($6,000 if age 50 or over). The difference is that the contribution to the Roth IRA is not deductible against income tax. But, the advantages are that the earnings compound tax free, rather than tax deferred, and the Roth IRA is not subject to the required minimum distribution rules, which means that the assets can compound tax free for life – if not needed for support.

The tax information contained herein is not intended to be used and cannot be used by any taxpayer for the purposes of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.

TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products. Annuity contracts and certificates are issued by Teachers Insurance and Annuity Association (TIAA) and College Retirement Equities Fund (CREF), New York, NY.

Investment products, insurance and annuity products: are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.


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