IRA Contribution Limits Rise For 2013

by on January 12, 2013

Save a little more for retirement.

Time to boost your IRA balance. In 2013, you can contribute up to $5,500 to your Roth or traditional IRA. If you will be 50 or older by the end of 2013, your contribution limit is actually $6,500 this year thanks to the IRS’s “catch-up” provision. The new limits represent a $500 increase from 2012 levels.1

January is an ideal time to max out your annual IRA contribution. If you are in the habit of making a single annual contribution to your IRA rather than monthly or quarterly contributions, try to make the maximum contribution as early as you can in a year. More of your money should have an opportunity for tax-deferred growth, not less. While you can delay making your 2013 IRA contribution until April 15, 2014, there is no advantage in waiting – you will stunt the compounding potential of those assets, and time is your friend here.2

Do you own multiple IRAs? If you do, remember that your total IRA contributions for 2013 cannot exceed the relevant $5,500/$6,500 contribution limit.3

Your IRA contribution may be tax-deductible. Are you a single filer or a head of household? If you contribute to both a workplace retirement plan and a traditional IRA in 2013, you will be able to deduct the full amount of your IRA contribution if your modified adjusted gross income is $59,000 or less. A partial deduction is available to such filers with MAGI between $59,001-69,000.4

 The 2013 phase-outs are higher for married couples filing jointly. If the spouse making the IRA contribution also participates in a workplace retirement plan, the traditional IRA contribution is fully deductible if the couple’s MAGI is $95,000 or less. A partial deduction is available if the couple’s MAGI is between $95,001-115,000.4

 If the spouse making a 2013 IRA contribution doesn’t participate in a workplace retirement plan but the other spouse does, the IRA contribution may be wholly deducted if the couple’s MAGI is $178,000 or less. A partial deduction can be had if the couple’s MAGI is between $178,001-188,000. (The formula for calculating reduced IRA contribution amounts is found IRS Publication 590.)5

 You cannot contribute to a traditional IRA in the year in which you turn 70½ or in subsequent years. You can contribute to a Roth IRA at any age, assuming your income permits it.1

 What are the income caps on Roth IRA contributions this year? Single filers and heads of household can make a full Roth IRA contribution for 2013 if their MAGI is less than $112,000; the phase-out range is from $112,000-127,000. For joint filers, the MAGI phase-out occurs at $178,000-188,000 in 2013; couples with MAGI of less than $178,000 can make a full contribution. (To figure reduced contribution amounts, see Publication 590.) Those who can’t contribute to a Roth IRA due to income limits do have the option of converting a traditional IRA to a Roth.7

As a reminder, Roth IRA contributions aren’t tax-deductible – that is the price you pay today for the possibility of tax-free IRA withdrawals tomorrow.8

Can you put money in an IRA even if you don’t work? There is a provision for that. Generally speaking, you need to have taxable earned income to make a Roth or traditional IRA contribution. The IRS defines taxable earned income as…

*Wages, salaries and tips.

*Union strike benefits.

*Long-term disability benefits received before minimum retirement age.

*Net earnings resulting from self-employment.

Also, you can’t put more in your IRA(s) than you earn in a given year. (For example, if you are 25 and your taxable earned income for 2013 amounts to $2,592, your IRA contributions for this year can’t exceed $2,592.)9

However, a spousal IRA can be created to let a working spouse contribute to a nonworking spouse’s retirement savings. That working spouse can make up to the maximum IRA contribution on behalf of the stay-at-home spouse (which does not affect the working spouse’s ability to contribute to his or her own IRA).

Married couples who file jointly can do this. The IRS rule is that you can contribute the maximum into this IRA for each spouse as long as the working spouse has income equal to both contributions. So if both spouses will be older than 50 at the end of 2013, the working spouse would have to earn taxable income of $13,000 or more to make two maximum IRA contributions ($12,000 if only one spouse is age 50 or older at the end of 2013, $11,000 if both spouses will be younger than 50 at the end of the year).6,9

So, to sum up … make your 2013 IRA contribution as soon as you can, the larger the better.

Citations.

1 – www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits [11/28/12]

2 – finance.zacks.com/can-ira-contribution-carried-forward-5388.html [1/9/12]

3 – helpdesk.blogs.money.cnn.com/2012/06/06/can-i-contribute-more-than-5000-to-multiple-iras/ [6/6/12]

4 – www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work [11/26/12]

5 – www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work [11/26/12]

6 – www.irs.gov/publications/p590/ch01.html#en_US_2011_publink10002304123 [2011]

7 – www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2013 [11/27/12]

8 – www.irs.gov/taxtopics/tc309.html [12/17/12]

9 – www.creators.com/lifestylefeatures/business-and-finance/money-and-you/can-you-contribute-to-an-ira-if-you-don-t-have-a-job.html [2011]

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The Fiscal Cliff & Your Taxes

by on January 11, 2013

What will change (and won’t change) as a result of the new legislation.

Several tax hikes, some tax breaks. Now that the fiscal cliff deal assembled in Congress is becoming law, it is time to look at some of the tax law changes that will result. Here are the major details in the bill, which will bring significant tax hikes to some households in an effort to increase federal revenues by $600 billion over the next ten years.1

The Bush-era tax cuts will be preserved for at least 98% of taxpayers. Individuals with incomes of $400,000 or less and households with incomes of $450,000 or less will not see their federal income tax rates rise. The EGTRRA/JGTRRA cuts have been made permanent for such earners.2,3

The wealthiest Americans are looking at a major income tax hike. The top marginal tax rate will rise 4.6% in 2013 to 39.6%. Individuals with more than $400,000 in taxable income and couples with more than $450,000 in taxable income will be affected. This is the first major income tax increase on the highest-earning taxpayers in 20 years.2,3,4

Now when you take that 39.6% top rate and pair it with the oncoming 3.8% Medicare surtax, what is the impact for the wealthiest taxpayers in dollar terms? It is major. The non-partisan Tax Policy Center calculates that in 2013, households with incomes between $500,000 and $1 million should see their federal income taxes rise by an average of $14,812. What about households with incomes above $1 million? The TPC projects taxes rising an average of $170,341 for these couples and families this year.3

Practically speaking, all working Americans will see taxes rise in 2013. The payroll tax holiday of the past two years officially ends with the new bill’s passage. In 2011 and 2012, employee payroll taxes were reduced by 2% as an economic stimulus – an idea that came from the White House. In 2013, the payroll tax rate returns to its old level and employees will pay 6.2% in Social Security taxes rather than 4.2%. This tax break saved a worker making $50,000 annually about $1,000 last year. Employee earnings up to $113,700 will be taxed.3,4

Estate taxes now top out at 40%. Additionally, the individual estate tax exemption falls slightly to $5 million. Both of these changes are permanent.4

The AMT has been patched – permanently. Congress no longer has to arrange an annual fix for the Alternative Minimum Tax that was never indexed to inflation. This patch is retroactive to 2012, of course.4

The Pease provision & personal exemption phase-outs are back. As a result of the deal, 80% of itemized deductions will be eliminated in 2013 for individuals with adjusted gross incomes of more than $250,000 and couples with adjusted gross incomes of more than $300,000. That threshold is also where personal exemption phase-outs will start in 2013.4

Dividends will not be taxed as ordinary income. Single filers with taxable incomes of more than $35,350 and joint filers with table incomes above $70,700 will see a top dividend tax rate of 15% this year. Dividends coming to individuals making more than $400,000 and households making more than $450,000 will return to the 20% level, 5% higher than they were in 2012. Investors in the 10% and 15% tax brackets will pay no taxes on dividends.2,4

The top capital gains tax rate is now 20%. Wealthy investors paid a 15% tax on long-term capital gains and qualified dividends in 2012. That will rise 5% this year. Single filers making more than $400,000 and joint filers making more than $450,000 will face this tax hike. Those in the 25%, 28%, 33% and 35% federal tax brackets will pay 15%, and those in the 10% and 15% brackets will face no capital gains taxes.4

Long-term unemployment benefits live on. They will be sustained through the end of 2013 for roughly 2 million people.2

Another “doc fix” has been made. Drastic cuts in Medicare payments to physicians will be avoided for 2013 as a result of the new legislation.

The EITC, AOTC & Child Tax Credit will be extended through 2017. President Obama has long sought to preserve the $2,500 American Opportunity Tax Credit for college expenses, the Earned Income Tax Credit and the Child Tax Credit – and that will occur thanks to the fiscal cliff deal. The $250 deductions for teachers’ classroom expenses will also be extended into 2013.4

50% bonus depreciation is preserved for 2013. The tax break that permits companies to accelerate depreciation schedules for major capital investments lives on for another year.4

The R&E tax credit & wind production tax credit are both sustained. Both federal tax breaks are available again for 2013.2

The charitable IRA rollover provision returns. You can practically hear the cheers ringing out at non-profits across the country: thanks to the fiscal cliff deal, people over age 70½ will again be permitted to make tax-free transfers from an IRA to a charity, university, or other qualified non-profit organization in 2013.4

The “sequester” will be delayed 2 months. The automatic federal spending cuts that were set to occur January 2 will be postponed until March while Congress tries to craft a plan to replace them.2

Citations.

1 – www.npr.org/templates/story/story.php?storyId=168366341 [12/31/12]

2 – www.cnbc.com/id/100348205 [1/2/13]

3 – latino.foxnews.com/latino/politics/2013/01/02/what-fiscal-cliff-deal-means-for-american-taxes/ [1/2/12]

4 -online.wsj.com/article/SB10001424127887323820104578216092043022764.html [1/1/13]

This material was prepared by MarketingLibrary.Net Inc.

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Fiscal Cliff Averted

by on January 2, 2013

If you’ve been paying any attention to the media over the past few weeks, you’ve heard about the looming Fiscal Cliff that threatened to push the fragile U.S. economy back in to recession.

As a New Year’s gift to the U.S. people, Congress decided to pass a bill averting this cliff.  It’s commendable that Republicans and Democrats could overcome their petty differences to pass a bill that actually makes sense.

My biggest annoyance with all this talk about the 1% paying their “fair” share in taxes, was that Democrats proposed couples with $250,000 in annual income pay higher taxes. In states like California and New York, $250,000 certainly doesn’t make you wealthy, and it definitely is no where close to the top 1% of earners in those states.

So I’m happy to see that they’ve raised the taxes only for couple with incomes over $450,000 – much more reasonable than the $250,000 originally proposed by President Obama.

Another good measure was the $5 million exemption on estates inherited from individuals, and $10 million from families, although the tax rate did increase slightly to 40%. Still it’s better than the original “cliff” version of 55% on estates over $1 million, and Obama’s version of 45% on estates over $3.5 million.

In another post, I’ll go over all the changes in more detail.

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Macro-Economic Follies

by on December 21, 2012

Every year, especially around Thanksgiving and Christmas, we hear the mainstream media tell us how important consumer spending is for our economy – after all consumer spending is 70% of our economy.

So by that logic, consumption is good and savings must be bad, right?

Well maybe if you’re a Keynesian economist.

But if you follow Adam Smith or Hayek, you believe that increased productivity leads to more wealth. Forced spending just leads to improper allocation of resources.

Here’s a fun explanation, in tune with the Christmas spirit:

 

 

You can read more on the topic at EconStories.tv.

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Our New Blog

by on December 20, 2012

We would like to welcome you to our new blog! The name and the branding is a play on a 70 year old poster produced by the British Government during World War II. It was intended to raise the morale of the public.  Here is an image on Wikipedia. Only a few copies were believed to have survived.  The copyright for the original artwork expired after 50 years and is now in the public domain.

We thought it was great catchphrase to describe our beliefs about investing and personal finance.  We hope you like the articles we post here and visit often!

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