There is still time!
by Grace S. Yung
Even though 2012 is now behind us, there is still time to make your 2012 IRA contribution and enjoy the potential benefits of tax-advantaged investing. In fact, investors are allowed to make 2012 IRA contributions through April 15 of 2013. Even if you have not yet established an IRA, it is not too late to do so, as the IRS allows you to open an IRA account for 2012 through April 15, 2013.
Which Type of IRA Is Right for You?
Today, there are two main types of IRAs: the Roth and the Traditional. With a Roth IRA, you are not allowed to deduct your contributions. However, in most cases, the qualified distributions that are withdrawn from a Roth IRA are tax-free.
Those who have a Traditional IRA have the benefit of tax-deferred growth while the funds remain in the account. Contributions to a traditional IRA may be partially or fully tax-deductible—although the deduction may be limited if you are also covered by a retirement plan through your employer and your income exceeds a certain amount.
With a Traditional IRA, participants are required to begin withdrawing at least a portion of their funds—or a Required Minimum Distribution—when they reach age 70½. This also means that no more contributions may be made into the account. With a Roth IRA, however, there is no age limit as to when contributions may be made or when funds must be withdrawn.
Other types of IRAs include:
SEP-IRA. A SEP-IRA, or Simplified Employee Pension Individual Retirement Account, is a variation of the Traditional IRA. These types of plans are used by business owners to provide a retirement savings option to their employees. Similar to a Traditional IRA, contributions to a SEP-IRA may be tax deductible, and the funds will be taxed as ordinary income upon withdrawal.
Beneficiary/Deceased/Inherited IRA. These IRA accounts are left to a beneficiary upon the owner’s death. If the original account holder was already receiving their required minimum distribution amount at the time of death, then the beneficiary who inherits the account may continue receiving such distributions. Typically, these funds may be received in the amount that has already been calculated for the original account owner, or at a different amount that is based upon the life expectancy of the beneficiary.
How Much Can You Contribute Each Year?
If you are covered by an employer’s retirement plan, the following table outlines the amount of adjusted gross income (AGI) that can affect your personal traditional IRA contribution deduction.
|Your Filing Status for 2012
|Your 2012 Modified AGI
|Single or Head of Household
|$58,000 or less
|Full deduction up to the amount of your traditional IRA contribution limit
|$68,000 or more
According to the IRS, if one partner in a traditional opposite-sex marriage is a stay-at-home spouse, they may still open an IRA account (even though they have no earned income), as long as the couple files a joint income tax return. This option is not available for LGBT partners. In fact, even if you and your partner live in a state where same-sex marriage is legal, IRA contributions are subject to federal rules, so most LGBT couples must still file their income taxes as single individuals.
Regardless of which type of IRA you have, you may only contribute up to a maximum annual amount. For the year 2012, total annual maximum IRA contribution limits are as follows:
• $5,000 for those who are age 49 or younger
• $5,000 plus an additional $1,000 catch-up contribution for those who are age 50 or older.
If the total amount of your earned taxable compensation for the year is less than these amounts, you may contribute only up to the amount of this compensation.
Calculating Your Partner’s Share of Your IRA Benefits
As many investors are aware, IRA owners may begin taking penalty-free withdrawals from IRA accounts upon reaching age 59½. However, depending on which type of IRA you have, there is no requirement that you must begin withdrawing from your IRA until the Required Beginning Date, or RBD. This is typically April 1 of the year following the year in which you turn age 70½.
Should an IRA owner pass away, the post-death distribution requirement is dependent upon whether the individual passes before or after the date of their RBD. Other factors include:
• Whether or not there is a designated IRA account beneficiary
• The identity of the designated beneficiary.
The amount of the Required Minimum Distribution, or RMD, is usually calculated by using the life expectancy of the designated beneficiary. However, these distributions are calculated in different ways if the beneficiary is the IRA account owner’s spouse or someone else.
• If the IRA owner’s spouse is the beneficiary:
If the sole beneficiary of the IRA account is the spouse of the IRA owner, this individual may have unlimited rights to the IRA funds and may even roll the funds into his or her own IRA account and delay account distributions until he or she reaches age 70½. Here, IRA distributions will be calculated during the surviving spouse’s lifetime, and any of the remaining funds at the spouse’s death will be paid using the spouse’s life expectancy.
The surviving spouse may also decide to leave the funds in the deceased’s IRA account. In this case, the option for calculating the amount of RMD can be quite beneficial to the spouse. For example, if the spouse does not roll the deceased’s IRA funds into his or her own IRA account, then the RMD will be calculated by dividing the balance in the deceased’s account (on December 31 of the year of death) by the spouse’s life expectancy.
Going forward, the life expectancy of a spouse will be recalculated for each subsequent year. A surviving spouse is the only type of IRA account beneficiary who is allowed to recalculate his or her life expectancy, and all other non-spousal beneficiaries are required to use a fixed term. In this case, because spouses may delay the commencement of lifetime distributions until they reach their required beginning dates, spouses are essentially allowed a longer deferral of the IRA income.
Unfortunately, because LGBT partners are not allowed to marry under federal law, the same-sex partners of deceased individuals will not be allowed to roll their partners’ IRA funds to their own IRA account.
• If the beneficiary is not the IRA owner’s spouse:
Overall, domestic partners have far fewer tax-advantaged options when transferring wealth to a surviving partner or other unrelated individual. When an IRA beneficiary is not the spouse of the account owner, the RMD must be determined by dividing the IRA account balance on December 31 of the year of death by the life expectancy of the non-spousal beneficiary. It is required that account distributions must begin by December 31 of the year following the year of the original IRA owner’s death.
The Bottom Line
There is still time to establish and fund your IRA account for 2012 and take advantage of the tax benefits that investing in these types of accounts may offer. It may be wise to also make a 2013 IRA contribution at the same time. By doing so early in the year, account holders could essentially deposit $10,000 or more and have an opportunity to grow these assets for an entire year in a tax-advantaged account, versus waiting until April of 2014 to do so.
It is important to keep in mind that all situations call for an investment plan that fits in with your specific financial goals. With this in mind, all planning should ideally be done via a qualified financial professional who is well versed in the area of investments and financial planning.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial Group, LLC in Houston.
See other MoneySmart columns:
What’s Different for 2013? (January 2013 OutSmart)
Considerations for Texas and your future investments.
LGBT Partners… (December 2012 OutSmart)
Working around the denial of your government benefits
Future Tax Rules Can Further Penalize LGBT Investors (November 2012 OutSmart)
But there is still time to act
Protecting your Wallet and your Heart (October 2012 OutSmart)
How and when to keep assets separate—even when you’re madly in love
Domestic Partner Tax Deductions in Home Ownership (September 2012 OutSmart)
With today’s historically low interest rates, it’s certainly a great time to either purchase or refinance a home.
Dying Intestate (August 2012 OutSmart)
Could you be leaving the state in charge of distributing your assets?
Protecting the Things that Matter (July 2012 OutSmart)
How those in the LGBT community can use life insurance planning strategies
When ‘I Do’ Becomes ‘I Don’t Anymore’ (June 2012 OutSmart)
Ensuring both partners’ fair share with a Domestic Partnership Agreement
Retirement (May 2012 OutSmart)
Using annuities can provide lasting income for both domestic partners: When depending on a partner’s retirement income, annuities can offer the perfect solution
Financial and Tax Planning Issues for Domestic Partners (April 2012 OutSmart)
Is Uncle Sam getting a bigger chunk of your income and wealth?
The Real Cost of Long-term Care (February 2012 OutSmart)
How LGBT caregivers are paying the price
Gay Money Matters (part 1) (February 2010 OutSmart)
Domestic Partners: Estate and Tax Planning
Gay Money Matters (part 2) (February 2010 OutSmart)
Protecting your assets . . . even when the rules don’t