It’s Not Too Late to Contribute to a Roth IRA

There’s still time to lower your 2011 tax bill by saving for retirement.

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Taxpayers will have two extra days to file their 2011 tax returns. April 17, 2012 is also the last day to make a retroactive contribution to your traditional and Roth IRA for 2011. If you didn’t make a contribution in 2011, now is the time to do it.

[See 401(k) and IRA Changes Coming in 2012.]

Maximum contribution. The maximum contribution amount to an IRA is $5,000 for people age 49 and under. If you are 50 or older, then you can add an additional $1,000 catch-up contribution to the maximum. This amount can be split between the traditional and Roth IRA as you see fit.

Income limits. Your modified adjusted gross income (MAGI) and whether you have access to a retirement account at work can affect the IRA deduction limit. For example, if you are single and contributing to an employer-sponsored retirement plan such as a 401(k), your MAGI needs to be less than $56,000 in 2011 to take the full deduction by contributing the maximum amount to your IRA. For other situations, check the IRS website. One advantage of waiting until 2012 to make a retroactive contribution is that you know your exact MAGI number. If you are near the income limits, it can be difficult to make this decision in 2011.

[See 10 Ways to Tap Your IRA Early Without Penalty.]

Traditional IRA. The main benefit of the traditional IRA is the tax deduction. By making a contribution right before the tax deadline, you can immediately and sometimes significantly lower your tax bill. However, all withdrawals from a traditional IRA will be subject to income tax. There is also a 10 percent early distribution penalty if you take the money out before age 59 ½. And after you reach 70 ½, you also need to figure out your required minimum distribution amount and withdraw accordingly.

Roth IRA. Contributions to a Roth IRA are not tax deductible. But if you follow the rules, the earnings in the Roth IRA account will not be subject to income tax. You can also withdraw your contributions, but not the earnings, without penalty before age 59 ½.. And you will not be required to take annual distributions in retirement. If you contribute to a traditional 401(k) plan at work, adding a Roth IRA to your portfolio can give you some tax flexibility in retirement.

[See 10 Reasons to Open a Roth IRA.]

If you just received a year-end bonus or tax refund, contributing to a traditional or Roth IRA is a great way to spend that windfall on your future.

Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.