One of the earliest lessons in life is that actions have consequences, and approaching retirement age without a substantial nest egg is one of those consequences. But if you are in this situation, you are not alone, as millions of other Americans are faced with the same need to save enough to retire comfortably.
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Our priorities shift throughout our lives. Early in the life cycle, home ownership is a priority; that is usually followed by raising and educating children. However, as retirement approaches, the focus needs to shift toward retirement funding. By the time most people are 45 or 50, their children are on their own, the mortgage is close to being paid off, and there is more discretionary income to set aside for retirement.
If you are starting to think about retirement, there are three pitfalls you need to avoid: (1) retiring on your birthday instead of your bank account, (2) not properly managing your risk and (3) retiring with too much debt.
One way to get your retirement funding started is by making tax-advantaged IRA contributions. Self-employed individuals can make tax-advantaged Simplified Employee Pension (SEP) plan contributions. You still have time to make an IRA and/or SEP contribution for 2011.
Generally, after the close of the year you can no longer take steps to alter the outcome of your tax return. However, both IRA contributions and SEP contributions can be made for 12 months after the year has closed, and if you converted a traditional IRA into a Roth IRA, you can undo that conversion after the close of the year. Here are the details:
IRA Contributions – IRA contributions (tax-deductible and non-deductible) for 2011 can be made up to and including the un-extended filing due date for your 2011 tax return, which is April 17, 2012. The maximum contribution allowed is $5,000 ($6,000 if age 50 or over) for each taxpayer. The annual maximum must be allocated between traditional and Roth IRA contributions.
If you are an active participant in an employer-sponsored plan, the IRA contributions are phased out for higher-income taxpayers. Roth IRA contributions are also phased out. The traditional IRA AGI phase-outs for 2011 are between $90,000 and $110,000 for married individuals filing jointly and individuals qualifying as a surviving spouse, $56,000 and $66,000 for unmarried individuals, and $0 to $10,000 for married individuals filing separately.
Where one spouse participates in an employer plan but the other does not, the non-participating spouse’s phase-out is between $169,000 and $179,000 for 2011.
SEP Plan Contributions – SEP plans are tax-deductible retirement plans for self-employed individuals. Contributions can be made up to and including the extended due date, which for the 2011 tax return is October 15, 2012. The maximum annual contribution to a SEP plan is the lesser of “25% of compensation” (20% of net profit after deducting the SEP contribution for the self-employed proprietor’s contribution) or $49,000. SEP plans have no AGI phase-out limitations and no catch-up contributions for older individuals.
Other Plans – Other plans such as Simple Plans and Keogh plans also permit contributions in 2012 for 2011.
For additional information related to making retirement plan contributions after the close of the tax year, please give this office a call.