It's not too late to make contributions to an IRA for 2010. You can establish and contribute to a 2010 IRA as late as April 18, 2011. If the IRA is the traditional, tax-deductible kind, you can deduct your contributions on your 2010 tax return. If you're under age 50, the maximum contribution is $5,000; if you were 50 or older by December 31, 2010, you can contribute up to $6,000.
The "charitable IRA rollover" rule was extended through 2011, permitting taxpayers who are 70½ or older to use their IRA to donate up to $100,000 to charity. The donation must be made directly from the IRA to the charity, and it counts as part of the taxpayer's required minimum distribution for the year.
If you turned 70½ in 2010, remember that you're now required to take a minimum distribution from your IRA (and, unless you're still working, from other retirement plans also) every year. If you delayed taking your first distribution last year, you have only until April 1, 2011, to take it or you'll be subject to a 50% penalty on the amount you should have taken.
Converting a traditional IRA to a Roth IRA is still an available option for all taxpayers this year. Although a conversion will generate taxable income in the year you do it, later qualifying withdrawals from the Roth will be tax-free. Your conversion opportunities are not limited to just traditional IRAs. You can also convert your 401(k), 403(b), or 457 plan to a Roth.
Teenagers and IRAs - Saving For Retirement?
With all the publicity about ROTH IRA conversions don't overlook an important planning opportunity for younger taxpayers. Saving for a teenager's retirement might sound far-fetched to parent and child alike, especially with college costs looming.
Yet setting up a ROTH IRA for a young taxpayer can be a smart and rewarding move to consider at tax time. A ROTH IRA differs from a traditional IRA in that you contribute with after-tax money but pay no taxes on withdrawals, meaning all growth is tax free. As with ROTHs for adults, not every teen qualifies, and there are strict rules to follow.
You can only open one if the child has income from a job - allowances don't count. You can't contribute more that the child's salary in any given tax year, up to the limit of $5,000. The deadline for making 2010 IRA contributions is April 18th.
Self employed individuals and family businesses may want to consider employing children so they can earn a salary and open a ROTH IRA. (Just make sure they do real work for a reasonable wage and you file W-2 forms reporting their earnings).
Here are five reasons why a ROTH IRA can be a good idea for these younger taxpayers:
1. Time to grow
So many taxpayers wait until their 30's or even later to start contributing to a retirement plan. Starting at age 16 or 17 allows decades of earning interest on interest.
2. Best to start early
We used to talk about the three-legged stool for retirement savings - Social Security, employer pension and personal savings. Today this does not seem to be a good illustration. Employer pensions are fewer and fewer in number and how will Social Security fare in the future? Starting to save early is more important than ever.
3. Good financial habits should begin young
Teaching younger taxpayers the value of compound interest and savings is important. Also important is helping them develop good financial habits. One of these habits is putting money aside regularly in a retirement account as well as other savings accounts for designated financial needs. As a result they are better prepared for the future.
4. Tax advantages
A teenager working part-time will have one of the lowest tax rates, making it a good trade-off to pay taxes on contributions now rather than accumulated retirement savings in a few decades when the total and the tax rate will be much higher. The ROTH IRA's growth and withdrawals are tax free. Judith Martin said "the invention of the teenager was a mistake....once you identify a period of life in which people get to stay out late and you don't have to pay taxes - naturally, no one wants to live any other way."
5. You can start small
You don't have to contribute the yearly maximum of $5,000 to the ROTH. Even if you have to start small - you have started!