You Still Have Time To Make 2012 IRA Contributions


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We've turned the calendar page to 2013. There's not much you can do to impact your 2012 taxable income. But there is something.

One of the few maneuvers that can add to your 2012 deductions involves contributions to a traditional IRA.

You can contribute to an IRA as long as you have earned income equal to or greater than your contribution. You can contribute up to April 15. There's no extension, even if you have a filing extension.

Your maximum contribution for 2012 can be $5,000. If you are age 50 or older, you can contribute up to an additional $1,000, the catch-up contribution.

For 2013, the limits are higher: $5,500, plus as much as another $1,000 catch-up contribution.

Sounds simple. But the rules about what counts as earned income can be tricky.

"The rules often reflect political compromises, and decisions based on what's needed to balance the federal budget rather than what a nontax professional might expect," said Ed Slott, editor of the IRA Advisor newsletter .

Don't forget that you can still contribute to an IRA if you participate in a workplace plan such as a 401(k) or a SEP IRA.

But your eligibility to deduct your contribution does hinge on whether you or your spouse uses a workplace plan, your tax filing status and your income.

If you are married and filing jointly, your 2012 contribution is fully deductible even if you belong to, say, a 401(k) plan so long as your modified adjusted gross income is below $92,000.

The deduction phases out between $92,000 and $112,000.

The 2013 phase-out range is $95,000 to $115,000.

Another common misperception is what constitutes earned income -- at least as far as the IRS is concerned, regarding IRA contribution eligibility.

Following are categories of income and which types do and don't constitute deductible earned income in the eyes of the IRS:

•Wages, salaries, commissions, professional fees, bonuses and other amounts received for personal services shown in Box 1 of a Form W-2 count.

Not qualified: pension and annuity income. Also, income from an IRA, Roth IRA, 401(k) account and Social Security benefits.

•Taxable alimony and/or maintenance payments count.

Not qualified: child support.

•Scholarship or fellowship payments if included in Box 1 of a W-2.

Not qualified: disability payments and unemployment compensation.

"Many people are surprised that unemployment compensation does not count," Slott said. "They point out that it is related to work -- you can collect only if you worked. And collecting it often requires steps that seem like work. But the bottom line is that it does not meet the IRS requirement."

•Net self-employment income.

Not qualified: rental income unless it is the taxpayer's business.

•Net self-employment income even if it is not subject to self-employment tax.

Not qualified: Income from interest, dividend and capital gain. Also excluded is certain income from partnerships and S corporations.

•Accrued vacation pay.

Not qualified: deferred compensation.

And once you reach the year in which you turn 70-1/2, you can no longer kick into an IRA.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Mutual Funds

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