It isn’t too late to make an IRA contribution for ’10 tax year
WASHINGTON — Is your tax bill too high? You may be able to cut it and save for your retirement at the same time.
You can make a contribution to an IRA until this year’s filing deadline, and deduct the amount on your 2010 taxes. The maximum deduction is $5,000 or $6,000 for those 50 and older. Those 70 and older are not eligible to make contributions. There are also limits, based on adjusted gross income, on how much you can deduct from your taxes if you are covered by a retirement plan at work.
But income limits that had prevented some taxpayers from rolling over a traditional IRA to a Roth IRA were removed starting in 2010.
Contributions to a traditional IRA are generally tax-free, but the distributions are taxed. In a Roth IRA, the contributions may not be deducted from your taxable income, but the distributions, principal and income, generally are not taxable when you withdraw the money. For both, there are penalties for early withdrawal.
If you converted to a Roth IRA last year, the amount of the conversion must be reported on your 2010 return using Form 8606. The resulting income is subject to tax, but you have a choice on when to declare it for income tax purposes. You can include all of it as income on your 2010 return or defer it, declaring half in 2011, the other half in 2012.
Mark Luscombe, principal tax analyst at CCH, a provider of tax, accounting, and audit information, said the choice was more of an issue before Congress extended the Bush tax cuts for another two years. “With rates being equal, you’re probably better off postponing,’’ he said.
People who withdrew money from retirement accounts last year could find themselves with bigger tax bills. Any money withdrawn from a non-Roth IRA or 401(k) plan must be declared as income.
If people withdrew that money before they turned 59, they also have to pay an additional 10 percent penalty, except for certain circumstances.
“It rarely makes sense to do that, especially for normal nonemergency situations,’’ said Bill Smith, managing director in the CBIZ MHM National Tax Office.
Smith said taxes withheld from early withdrawal payments often are “drastically insufficient’’ to pay the taxes. “If you didn’t think about it going in, you’re going to have a big surprise,’’ he said.
You might be able to avoid the 10 percent penalty for early IRA withdrawals if you are permanently or totally disabled, if you rolled over the money to a different retirement account within 60 days of the withdrawal, or if you used the money for one of the following:
■ To pay for health insurance premiums if you were unemployed.
■ To buy a house in some cases.
■ To pay college tuition and fees for yourself or a dependent.
■ To pay medical expenses above 7.5 percent of your adjusted gross income.