Mark Twain once said, "The rumors of my death have been greatly exaggerated."
Like Mr. Twain's rumored demise, the notion that the traditional individual retirement account is no longer a useful part of a financial plan has been greatly exaggerated.
Contributions to a traditional IRA continue to be a viable financial and retirement planning tool despite non-deductibility for some individuals.
All you need to make a traditional IRA contribution are earnings as an employee or as a self-employed person.
The amount that can be contributed for 2011 is the lesser of $5,000 ($6,000 if you have attained age 50) or your earnings from your work. There is no minimum age for making a traditional IRA contribution for tax purposes.
If a 16 year old works for the summer, makes $5,000 and blows it all at the mall, the tax code permits mom, dad or whomever to give him/her $5,000 to contribute to a traditional IRA on his behalf. There is a maximum age for IRA contributions. No traditional IRA contributions may be made for people over 70-1/2, even if they are still working as hard as they were at 30-1/2.
An additional contribution of $5,000 is permitted if the traditional IRA participant has a spouse who doesn't work outside the home. If both spouses are under age 50, the total contribution in this situation is $10,000 and the spouses can divide the amount contributed up any way they choose, so long as neither receives more than $5,000 into his/her account.
The question of deductibility is often confusing to many taxpayers. There are two questions that may have to be answered to determine if a traditional IRA contribution is fully deductible, partially deductible or not deductible.
The first question is: Are you covered by a plan? If the answer is no, then the traditional IRA contribution is deductible regardless of the taxpayer's income. Whether or not you are covered by a plan depends on the type of employer-sponsored plan in place. If you're not sure, your employer can tell you because employers must check a box on every employee's W-2 stating whether they are covered.
If the answer is yes and you are covered by a plan but your spouse is not, then only you are exposed to the next test. Your spouse's contribution to a traditional IRA is fully deductible up to new phase-out limits of $169,000 to $179,000 of joint income. If both of you are covered by a plan, then the next test will determine to what extent you both can deduct your contributions.
Assuming coverage by a plan, the next question that must be answered is: How much is your income?
For 2011, taxpayers with adjusted gross incomes of $56,000/90,000 (single/married filing jointly) or less, the contribution is fully deductible.
For taxpayers with AGI more than $66,000/$110,000 (single/married filing jointly), no IRA deduction is permitted.
For those with an AGI between those levels, the amount of the deduction is phased out proportionately. There is a $500 floor to the deduction that will apply to those whose AGI is close to the upper limit.
For example, a single person who is covered by an employer's plan has an AGI (excluding the IRA deduction) of $61,000. Since that's 50 percent of the way from $56,000 to $66,000, the taxpayer may deduct $2,500 of a $5,000 contribution ($5,000 times 50 percent. The other $2,500 of the contribution is non-deductible.
The best part of the traditional IRA deal is the tax-deferred growth potential your investments can enjoy inside the account. Your earnings will grow much faster when not dragged down by the weight of a current tax bill.
Your financial planner can show you whether and how a traditional IRA can fit into your retirement plan.
This article was prepared by Forefield Inc./Raymond James for use by Marc P. Tomberg, branch manager at Raymond James Financial Services, member FINRA/SIPC. His office is located in Ryanwood Square at 2140 58th Avenue in Vero Beach. Contact Mr. Tomberg by phone at (772) 778-4399 or visit www.raymondjames.com/marctomberg.