Documeent title on one or two Tax lines savings Gustan opportunities Book 24pt during the 2013 IRA season The IRA season, from January 1 through April 15, may offer you opportunities to cut taxes and enhance your estate planning. In this article, TIAA-CREF wealth planners Doug Rothermich, JD and John O Shea, JD answer frequently asked questions on IRAs and share their thoughts regarding the current IRA season. 1. Why do many financial providers, like TIAA-CREF, emphasize IRAs each year beginning in January? Most people begin to receive their important income tax papers (e.g., W-2 and 1099 forms), in January and, as a result, start to think about ways of reducing the amount of federal, and possibly state, income tax owed on or before the IRS tax filing deadline of April 15. With that in mind, most taxpayers can receive an up-front income tax deduction on contributions to a Traditional IRA. You can contribute up to $5,000 ($6,000 if age 50 or over) of earned income for 2012. You can contribute up to $5,500 ($6,500 if age 50 or over) of earned income for 2013. If you have not previously made your 2012 contribution, then during the time frame of January 1 through April 15, you can contribute for both 2012 and 2013 a total of $10,500 ($12,500 if age 50 or over). Any earnings from your contributions grow on a tax-deferred basis until you tap into those funds in retirement. 2. Are you saying that I can contribute to a Traditional IRA in 2013 and deduct the amount against 2012 income? Yes. If you contribute to a Traditional IRA between January 1 and April 15, you have the option of treating the amount as a contribution for 2012 or 2013. If you don t specify which year, the financial provider typically reports the contribution for the current year. 3. What if I already filed my income tax return (e.g., in February), then learn about this strategy later, and decide to make an IRA contribution in March for the previous year? You can still treat it as a 2012 contribution as long as you contribute by the due date of the federal income tax return (April 15 in 2013), not including extensions. In this case, you would file an amended 2012 federal income tax return to claim the deduction and request a refund, if applicable. 4. How does the up-front income tax deduction work? Anyone with earned income who is under age 70½ is eligible to contribute to a Traditional IRA, but the question is whether you can deduct the contributed amount against taxable income. The rules for deductibility vary, depending upon your marital status and income level, referred to as adjusted gross income (AGI). 5. What if my AGI is above the threshold for receiving an income tax deduction? You can still contribute up to $5,500 each year to a Traditional IRA ($6,500 if age 50 or over). There are two benefits to this strategy. First, even though the initial contribution is not tax deductible, the investment earnings can still accumulate tax deferred until withdrawal. Second, the IRA typically has some creditor protection attributes at the federal and at most state levels, making it particularly attractive to physicians and other professionals who are at a higher risk for professional liability.
Another option is to explore the merits of a Roth IRA. The Roth IRA uses an AGI threshold for who is eligible to contribute that is substantially higher than what applies for eligibility for tax deduction with a Traditional IRA. (See table below.) Roth IRA contributions can be made at any age, even after age 70½. And, the contribution amount is the same as with a Traditional IRA $5,500 ($6,500 if age 50 or over). The difference is that the contribution to the Roth IRA is not deductible against income tax. But, the advantages are that the earnings compound tax free, rather than tax deferred, and the Roth IRA is not subject to the required minimum distribution rules, which means that the assets can compound tax free for life if not needed for support. Rules for contributing to a Roth IRA Marital status Ability to contribute up to $5,000 ($6,000 if 50 or older) for 2012. Ability to contribute up to $5,500 ($6,500 if 50 or older) for 2013. Single individual For 2012, contribute the full amount if AGI is $110,000 or less. Make a partial contribution if AGI is between $110,000 and $125,000. If AGI exceeds $125,000, consider making a nondeductible contribution to a Traditional For 2013, contribute the full amount if AGI is $112,000 or less. Make a partial contribution if AGI is between $112,000 and $127,000. If AGI exceeds $127,000, consider making a nondeductible contribution to a Traditional Married couple For 2012, contribute the full amount if you and your spouse s combined AGI is $173,000 or less. Make a partial contribution if you and your spouse s AGI is between $173,000 and $183,000. If AGI exceeds $183,000, consider making a nondeductible contribution to a Traditional For 2013, contribute the full amount if you and your spouse s combined AGI is $178,000 or less. Make a partial contribution if you and your spouse s AGI is between $178,000 and $188,000. If AGI exceeds $188,000, consider making a nondeductible contribution to a Traditional Tax savings opportunities during the 2013 IRA season January, 2013 2
Rules for Traditional IRA tax deductibility Marital status Single individual or head of household (who doesn t participate in any employer-sponsored Single individual or head of household (who participates in an employersponsored Married filing separately (one spouse participates in (neither spouse participates in (both spouses participate in (one spouse participates in Potential tax deduction on a contribution of up to $5,000 on a Traditional IRA ($6,000 if age 50 or over) for 2012. Potential tax deduction on a contribution of up to $5,500 on a Traditional IRA ($6,500 if age 50 or over) for 2013. Deduct the full amount from income as long as the earned income is at least equal to the contributed amount. For 2012, deduct the full amount from income as long as (A) earned income is at least equal to the contributed amount, and (B) the AGI for the tax year is $58,000 or less. Deduct a partial amount if AGI is between $58,000 and $68,000. For 2013, deduct the full amount from income as long as (A) earned income is at least equal to the contributed amount, and (B) the AGI for the tax year is $59,000 or less. Deduct a partial amount if AGI is between $59,000 and $69,000. For both 2012 and 2013, deduct a partial amount from income if you and your spouse s combined AGI is less than $10,000. For both 2012 and 2013, deduct the full amount from income for each (a combined $11,000 to $13,000) regardless of combined AGI. For 2012, deduct the full amount from income for each (a combined $10,000 to $12,000) as long as (A) you and your spouse s combined earned income is at least equal to the contributed amount, and (B) you and your spouse s AGI for the tax year is $92,000 or less. Deduct a partial amount if you and your spouse s AGI is between $92,000 and $112,000. For 2013, deduct the full amount from income for each (a combined $10,000 to $12,000) as long as (A) you and your spouse s combined earned income is at least equal to the contributed amount, and (B) you and your spouse s AGI for the tax year is $95,000 or less. Deduct a partial amount if you and your spouse s AGI is between $95,000 and $115,000. For 2012, deduct from income the participating spouse s contribution as long as (A) you and your spouse s combined earned income is at least equal to the contributed amount, and (B) you and your spouse s AGI for the tax year is $92,000 or less. Deduct a partial amount if you and your spouse s AGI is between $92,000 and $112,000. For 2012, deduct from income the nonparticipating spouse s contribution as long as you and your spouse s combined AGI does not exceed $173,000. Deduct a partial amount if you and your spouse s AGI is between $173,000 and $183,000. For 2013, deduct from income the participating spouse s contribution as long as (A) you and your spouse s combined earned income is at least equal to the contributed amount, and (B) you and your spouse s AGI for the tax year is $95,000 or less. Deduct a partial amount if you and your spouse s AGI is between $95,000 and $115,000. For 2013, deduct from income the nonparticipating spouse s contribution as long as you and your spouse s combined AGI does not exceed $178,000. Deduct a partial amount if you and your spouse s AGI is between $178,000 and $188,000. Tax savings opportunities during the 2013 IRA season January, 2013 3
The power of tax-deferred compounding in a Traditional IRA If you re able to regularly contribute to a Traditional IRA and are eligible to deduct the contributed amount, it can be a powerful supplement to other retirement benefits. Take a hypothetical example of Arthur (age 40), who maximizes his annual contribution to his Traditional IRA for 25 years to supplement his retirement income. He receives an annualized return of 5%. His highest federal marginal income tax bracket is 25%, and his highest marginal state income tax bracket is 5%. The table below combines the federal and state tax rates to estimate Arthur s annual and total tax savings. If tax rates should increase, his annual and total tax savings would also increase, making his tax strategy even more desirable. Arthur s Age IRA Amount IRA Contribution IRA Balance Annual Tax Savings Total Tax Savings 40 $5,500 $5,775 $1,733 $1,733 41 $5,775 $5,500 $11,839 $1,733 $3,465 42 $11,839 $5,500 $18,206 $1,733 $5,198 43 $18,206 $5,500 $24,891 $1,733 $6,930 44 $24,891 $5,500 $31,911 $1,733 $8,663 45 $31,911 $5,500 $39,281 $1,733 $10,395 46 $39,281 $5,500 $47,020 $1,733 $12,128 47 $47,020 $5,500 $55,146 $1,733 $13,860 48 $55,146 $5,500 $63,678 $1,733 $15,593 49 $63,678 $5,500 $72,637 $1,733 $17,325 50 $72,637 $6,500 $83,094 $1,950 $19,275 51 $83,094 $6,500 $94,074 $1,950 $21,225 52 $94,074 $6,500 $105,603 $1,950 $23,175 53 $105,603 $6,500 $117,708 $1,950 $25,125 54 $117,708 $6,500 $130,418 $1,950 $27,075 55 $130,418 $6,500 $143,764 $1,950 $29,025 56 $143,764 $6,500 $157,777 $1,950 $30,975 57 $157,777 $6,500 $172,491 $1,950 $32,925 58 $172,491 $6,500 $187,941 $1,950 $34,875 59 $187,941 $6,500 $204,163 $1,950 $36,825 60 $204,163 $6,500 $221,196 $1,950 $38,775 61 $221,196 $6,500 $239,081 $1,950 $40,725 62 $239,081 $6,500 $257,860 $1,950 $42,675 63 $257,860 $6,500 $277,578 $1,950 $44,625 64 $277,578 $6,500 $298,281 $1,950 $46,575 65 $298,281 $6,500 $320,021 $1,950 $48,525 Totals $159,000 The above is based on hypothetical assumptions and not intended to represent the performance of any specific investment company product. It cannot predict or project investment returns. The IRA balances and the tax savings balances are pre-tax. Any withdrawal is subject to federal (and possibly) state income tax for the distribution year. Tax savings opportunities during the 2013 IRA season January, 2013 4
Contribute to someone else s IRA as a gift Why would I want to contribute to an IRA as a gift, and how would I go about doing that? If you want to help a friend or family member, such as a child or grandchild, who may not be able to save for retirement, you can gift to that person the amount needed so that he or she can contribute to an IRA each year. The friend or family member can contribute to an IRA each year as long as he or she has earned income at least equal to the gifted amount. For example, you could make a gift/contribution for a teenager with summer employment, a college student working parttime, a young adult just entering the full-time workforce who is trying to pay off student loans, or more established adults who are employed but have not been able to adequately save for their retirement. Under the federal gift rules, you can gift up to $14,000 in 2013 to any person without reporting the gift amount to the Internal Revenue Service, but the IRA contribution rules limit you to $5,500 per person ($6,500 if age 50 or over). This IRA gift provides you with a way to teach the individual about investing and to discuss their comfort level with dealing with market fluctuations and the merits of diversifying the IRA investment portfolio in different asset classes, such as stocks, bonds and real estate. This educational process is especially important if this person will eventually serve as your agent under a Durable Power of Attorney, or if this person will inherit a larger, more substantial amount, upon your death. As an added bonus, Traditional IRAs and Roth IRAs have broad creditor protection under federal and most state laws, which can be beneficial to a younger loved one who has professional liability concerns, a bad marriage or other creditor issues. Best of all, you can open a low-cost TIAA-CREF Traditional IRA or Roth IRA product for a family member, which then qualifies the family member to receive our advice services at no additional cost. You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call 877 518-9161, or go to tiaa-cref.org for a current prospectus that contains this and other information. Please read the prospectus carefully before investing. Investment products are not FDIC insured, may lose value and are not bank guaranteed. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value. The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purposes of avoiding tax penalties. It was written to support the promotion of TIAA-CREF Wealth Management Services. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor. Examples included herein are hypothetical and for illustrative purposes only. Wealth Management Group Services are provided through Advice and Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a Registered Investment Adviser. TIAA-CREF Individual & Institutional Services, LLC, also distributes securities and provides additional brokerage services in its capacity as a registered broker/dealer, member FINRA. TIAA-CREF Trust Company, FSB provides investment management and trust services. 2013 Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY 10017. C8317 A147121_289902 (02/13)