retirement

IRA contribution window closing soon

Planning on making a contribution to an IRA for the 2013 tax year? Better act fast because the IRA contribution window will be closing soon. The April 15 deadline is fast approaching.

The contribution limit for 2013 and 2014 is $5,500. Those over age 50 get to save an extra $1,000 per year before they bail out of the workplace.

Wait until the very last minute?

If you fly by the seat of your pants and want to wait until 11:59 p.m. on tax day to swoop in with a deposit for the 2013 contribution year, you may be in luck -- if, that is, the custodian holding your IRA account allows it.

Different custodians have different rules about deposits. Investors making a contribution to an IRA at Fidelity Investments, for instance, have very close to the stroke of midnight on April 15 to make an online deposit or a mobile check deposit. To send an IRA contribution by snail mail, the envelope must be postmarked by April 15 and you must keep whatever records prove the postmark -- for instance, by using USPS certified mail or sending it via FedEx or UPS.

Wells Fargo has similar rules: The cutoff is midnight on April 15 for prior year contributions if the deposit is made online, according to Michele Grant, director of IRA products at Wells Fargo. Be sure to check with your bank or brokerage to clarify their rules for deposits so the IRA contribution window doesn't unexpectedly slam shut on you.

That's not to say that waiting until the last second is an advisable strategy.

"Just like every kind of deadline, people wait until the last minute and send it in. Get your contributions in early; send it on April 10," says Certified Financial Planner Elliot Herman, CPA at PRW Wealth Management in Quincy, Mass.

Shape up, procrastinators

Besides the stress and annoyance of possibly missing the deadline, waiting until the last minute to get a contribution to your IRA only hurts you in the long run. Certainly contributing at all is a huge step, but Stuart Ritter, a Certified Financial Planner and vice president of T. Rowe Price Investment Services, thinks investors should raise the bar for next year.

"As you're making your 2013 contribution at the very last minute, set up an automatic contribution to your IRA for your 2014 contribution," he says.

The sooner your money gets into the cozy confines of the tax-advantaged retirement account, the sooner it can be invested. Just think "how much potential compounding and growth people are missing out on by waiting until the last minute," Ritter says.

Deciding between a Roth and a traditional

The difference between a Roth IRA and a traditional IRA is the way they are taxed. For those who qualify, a traditional IRA lets investors take a deduction in the year the contribution is made. So an investor with qualifying income who makes a $5,500 contribution for 2013 will be able to take that deduction when she files her 2013 taxes.

A Roth IRA, on the other hand, requires that money go in after taxes have been paid. Earnings can be withdrawn tax-free at age 59 1/2 as long as the account has been open for five years, but contributions can be taken out at any time, tax-free and penalty-free.

In some years, for some investors, one type of IRA may seem more appealing than the other.

"Part of that is a little bit of looking into your crystal ball. At Bankrate.com, you have a traditional vs. Roth comparison tool. Make some assumptions using the tool and run a few different scenarios. What they get shows them: This is what you end up with after putting in your goals and objectives," says James Barnett, CPA, Certified Financial Planner and estate and trust manager at Kaufman, Rossin & Co. in Boca Raton, Fla.

The rules for determining if you qualify for the full deduction from a contribution to a traditional IRA can be complex. If you are not covered by a workplace plan, then you can take the full deduction of your contribution amount regardless of your income. Income phaseouts apply if you or your spouse has access to a workplace plan, and these phaseouts may steer you in one direction or the other.

Income phaseouts for making tax-deductible traditional IRA contribution:

20132014
Head of household or single, and covered by workplace plan$59,000-$69,000$60,000-$70,000
Married filing jointly and you contribute to workplace plan$95,000-$115,000$96,000-$116,000
Married filing jointly and your spouse contributes to a workplace plan$178,000-$188,000$181,000-$191,000
Married filing separately$0 to $10,000$0-$10,000

Source: IRS.gov

Income phaseouts for Roth IRA contributions:

20132014
Married couples filing jointly$178,000-$188,000$181,000-$191,000
Single or head of household$112,000-$127,000$114,000-$129,000
Married filing separately$0 to $10,000$0 to $10,000

Source: IRS.gov

For those who have access to a workplace plan, "If you're single and make $80,000, you can't get a deduction, so doing a Roth would make sense," Herman says.

He prefers the Roth over the traditional in general. "The Roth will be more powerful over the long run. It's growing tax-deferred and you can take it out tax-free. Given the choice, the Roth will be a lot more beneficial," he says.

No matter which account you choose, getting as much money as possible into a retirement account is only the first step. Ensuring that your money is properly invested and earning a good rate of return as soon as possible is another important goal.

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