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IRA contribution deadline looms

By Greg McBride, CFA · Bankrate.com
Tuesday, April 9, 2013
Posted: 4 pm ET

Earlier Tuesday, I joined Gary Goldberg Financial Services' "Money Matters" radio show to discuss the fact that consumers can still make 2012 individual retirement account contributions through April 15, 2013. An edited transcript and audio file appear below.

Gary: Some people want to beat the deadline for funding their 2012 IRA. Let's talk about that: What is the deadline to fund the 2012 IRA. Is it April 15?

Greg: It is. It's coming up quick, it's Monday. I think one of the things that bears pointing out here, Gary, is that, for so many other things, on Dec. 31, the door slams shut. You don't get a chance to make retirement contributions for your 401(k) beyond Dec. 31 for a given year. With an IRA, you get an extra window of time -- you actually get up until April 15. So it's the one area of retirement planning where you have the ability to still make last year's contribution.

Gary: Here's where a lot of people get confused: They think that if they're covered by a 401(k) plan, they cannot make a contribution into an IRA. You and I both know that is not true, but the type of IRA contribution they make if they're covered by a 401(k) plan is a bit different. Explain that.

Greg: The nuance of whether or not you're covered by an employer retirement plan affects your IRA is whether or not you can deduct that contribution from your taxes. It should not dissuade you from making an IRA contribution regardless of whether or not you can deduct it. It's just sound retirement planning. It's not an either/or between the 401(k) and the IRA; you have to have both. Fund both to the extent you possibly can. Whether or not that's deductible depends upon a couple of factors. One is whether or not you're covered by a plan at work. And second, based upon your income, that deductibility does phase out at higher levels of income.

Gary: So, let's talk about the advantage or disadvantage of funding a nondeductible IRA. Why would somebody fund a nondeductible IRA if they can't get the tax deduction? Would they not be better off putting the money into a Roth IRA, which grows tax-free?

Greg: I like doing the Roth IRA. You're not going to be able to deduct that now. The thing about the Roth is that your ability to contribute directly to a Roth is limited by income. However, you can do what's known as the "backdoor Roth," which is: Contribute to a nondeductible IRA and then immediately convert that to a Roth. So it's kind of like changing planes in Atlanta. You can't go directly from here to there, but you can still get to that desired Roth status even if your income is too high to contribute directly to it.

Gary: So if you contribute money into a nondeductible IRA, is there an income limitation?

Greg: No, there's not. Regardless of whether or not you're covered by a plan at work or your income is high, I still think it's important to contribute to an IRA. Even doing so on a nondeductible basis is still advantageous because you can then convert that to a Roth -- and now you've accumulated a pot of money that is free from future taxation and is not subject to minimum required distributions at age 70 ½. So it's another pot of money you can accumulate for those later years, the 80s and 90s, or to pass on to your heirs.

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