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Important to research eligibilities before opening new IRA

1/30/14 | By Chip Gordy, Contributing Writer

As April 15 approaches, many taxpayers should make sure that they contribute to their IRAs so as to receive the related tax benefit.

If you do this, it’s important to make sure that you satisfy the contribution eligibility requirements in order to avoid penalties. Following are some important reminders to help you to meet these requirements.

First, you must have eligible compensation in order to be qualified to contribute to an IRA. For IRA purposes, eligible compensation includes wages, salaries, tips, commissions received as a percentage of sales, and taxable alimony. If you are a sole proprietor or a partner in a partnership, your compensation is based on your  net earnings from your business, reduced by contributions to any employer-sponsored plan that you adopt and any deduction allowed for 50 percent of your self-employment taxes.

Amounts you receive as interest, annuity, dividends, pension, earnings and profits from property investments, and any amount you exclude from your income are not considered eligible compensation for IRA purposes.

The maximum dollar amount that may be contributes to an IRA for 2013 is $5,500 ($5,500 for 2014). If you’re at least age 50 by the end of the year of which the contribution applies, you may contribute an additional $1,000 (referred to as a  catch-up contribution). If your eligible compensation is less than the maximum, then you are eligible to contribute only up to the amount you earn for the year.

You may contribute to your Traditional IRA to age 70 ½, but if you make a contribution in the year you reach age 70 ½ or later, the amount will be considered an excess  contribution. If this happens, the amount must be taken out of your IRA by Oct. 15 of the following year in order to avoid penalties (Roth IRA contributions are different as there’s no age limit for contributions).

The contribution deadline tax-filing extensions don’t apply to your IRA and or Roth IRA contributions. This means that your contributions must be deposited by your tax filing due date, which is usually April 15. Similar to your tax return, a postmark date is considered timely. Therefore, if you send your contribution in the mail by April 15, you will have met the deadline, even if your financial institution receives the contribution after April 15.

Check to make sure you meet the eligibility requirements and that you received eligible compensation for the year before you make your IRA contribution. To be sure that your contribution was deposited for the right tax year, check your account statement for the month the amount is deposited. Financial institutions are more likely to correct errors if they’re detected early. And most importantly, check with your tax and financial professional for assistance with determining whether contributing to your IRA is a good financial decision for you.

— Chip Gordy, MBA, CRPC is a Financial Advisor with Coastal Wealth Management, LLC, 10441 Racetrack Rd, Unit 1, Berlin, Md., 21811 and specializes in Wealth and Retirement Planning. He can be reached at 410-208-4545 or chip@coastalwealtmgmt.com. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Coastal Wealth Management LLC & Cambridge are not affiliated. Cambridge does not offer tax advice.

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