There's Still Time to Fund a 2011 IRA

If you meet the criteria but don’t need the additional deduction for 2011 and are expecting to owe more in taxes this year, consider opening an IRA for 2012. Between now and April 17, you may fund a Roth or Traditional IRA for either 2011 or 2012.Contributing to a Traditional IRA can help to lower your tax burden for 2011 if you meet the following criteria: you are not currently eligible for a tax-deferred retirement plan, or you have an adjusted gross income of $56,000 or less for singles, or $89,000 or less for married couples filing jointly. If you are married, and your spouse is eligible for a company retirement plan, but you are not, your contribution is fully deductible as long as your combined annual income does not exceed $167,000.

If you don’t meet those criteria and can’t take the tax deduction, there is still a very good reason to consider investing in an IRA as soon as possible: the tax-deferred interest compounding offered by the Traditional IRA and the tax-free interest compounding that the Roth offers to those who meet certain conditions. To avoid taxes on the accumulated interest generated by a Roth IRA, you must hold it for a minimum of five years or meet one of the following qualified exemptions: reach the minimum age of 59 1/2; spend up to $10,000 for a first-time home purchase; or have a disability. While estate taxes may have to be paid on the value of the Roth IRA upon the death of the holder, beneficiaries will not be subject to income tax on any part. 

In choosing the option that’s right for you, consider the pros and cons of paying taxes up front or waiting until retirement. While your contribution to a traditional IRA saves you in taxes now, Uncle Sam ultimately will demand his due; withdrawals from a Traditional IRA in retirement are fully taxed, and raise the income figure used to compute the taxability of your Social Security. Contributions to a Roth IRA, on the other hand, are not deductible now, but by paying taxes on your contribution in the years the money is earned, you will avoid being hit with the tax bill in your golden years. There are no withdrawal requirements for a Roth, and the compounded interest may be tax free.

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