Contributing to a traditional IRA is a great way to lower your tax bill. Unfortunately, not everyone qualifies for this deduction.
You don't have to itemize to deduct the amount you contributed to an IRA (and reduce your adjusted gross income dollar for dollar). But your income has to fall below certain levels to write off the full amount of your contribution. (Learn more about IRA contribution and deduction rules for your 2010 tax return and the rules for 2011.)
If your income exceeds the limits for the tax break, you still need to keep track of your after-tax (nondeductible) contributions by filing a Form 8606 with the IRS, according to the March issue of Kiplinger's Personal Finance magazine. Here's why:
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Filing a Form 8606 the years when you make nondeductible IRA contributions will be important when it's time to withdraw funds or if you convert to a Roth. Money that was already taxed is excluded from your taxable distribution or the taxable portion of the amount you convert on a pro-rata basis. For example, if you convert a $100,000 traditional IRA to a Roth and you made $10,000 in nondeductible contributions, 10% of the converted amount would be tax-free.
What if you haven't submitted the required form with your returns? You're in good company. Most people have never heard of Form 8606. You can file a form for past years and, although there's a $50 penalty for failing to file, it may be waived for reasonable cause. Call the IRS to explain your situation and ask how to proceed. Then, depending on how much money is at stake, you can decide whether it's worth the hassle of documenting earlier after-tax contributions.
-
The Stoic Retirement: Ancient Wisdom for Today's RealityA "Stoic retirement" doesn't mean depriving yourself. It's a character-based approach to life and aging that can bring calm and clarity.
-
My Teen Crashed His Car and Now Our Insurance Has Tripled. What Now?Dealing with the costly aftermath of a teen car accident is stressful. Here are your options for navigating it.
-
11 Outrageous Ways To Spend Money in RetirementWhether you have excess cash to spend or want to pretend, here’s a look at 11 ridiculous ways retirees can splurge.
-
Skip the Sales Taxtaxes Save money back-to-school shopping in 17 states with sales tax holidays this summer.
-
What to Do If Someone Files a Tax Return in Your NameScams Take these steps if you think you're a victim of tax fraud.
-
2014 Sales Tax Holidays for Back-to-School ShoppingTax Breaks You can shop tax-free for clothing, computers, school supplies and more on certain days in these 16 states.
-
How I Dodged a Phony IRS Tax Scam
Scams Here's what I did to avoid becoming a victim when someone called and tried to rip me off.
-
Traveling? Better Budget for Taxes
Travel You’ll pay plenty for hotels, rental cars and restaurant meals.
-
IRS Warns of E-mail Tax Scam
Scams Watch out for bogus e-mails claiming there's a problem with your 2013 tax return.
-
IRS Has $760 Million in Unclaimed Refunds
taxes Here's how to find out if you're owed money and how to claim it.
-
How to Avoid Tax Scams
Scams Take these steps to lower your risk of becoming a victim of fraud or identity theft during tax season.
