Although 2012 has come and gone, you can still contribute money into your IRA for the 2012 tax year. But the deadline is nearing fast. For all you procrastinators, you have until Monday, April 15th, 11:59pm Eastern time to do it!
For the majority of readers here, a Roth IRA will be the way to go. I’ve previously written about opening a retirement account and investing with Vanguard.
Since Dec 1st, 2011, I’ve been regularly plugging away at my Roth IRA (and other investments like my 401K). With today’s new market highs, my total returns (in less than a year and a half) are doing pretty well:
Sure these aren't life changing returns, but the returns have been stable and consistent. I don’t expect the market to always do this well. In fact, there will likely be ups and downs in the next few months. However, each time the market drops, I’ll use those opportunities to pick up more shares on sale.
For 2012, you can still contribute up to $5,000 ($6,000 if age 50+).
These contributions are made with after tax dollars, so you cannot deduct your contributions. The upside is that withdrawals on your account after age 59 ½ are not taxed without minimum required distributions. I’ve written about the contribution limit changes here.
For single filers: you can contribute up to the limit if your income is less than $110,000, with a reduced contribution if your income falls between $110,000 to $125,000. If your income exceeds $125,000, you cannot contribute to a Roth IRA.
If you file jointly as married: you can contribute up to the limit if your income is less than $173,000, with a reduced contribution if your income falls between $173,000 to $183,000. If your income exceeds $183,000 you cannot contribute to a Roth IRA.
In order to contribute to a Roth IRA, you must have earned income in the year you want to make a contribution. This means you must have received income from work you performed including salary, alimony, and military pay. This does not include interest and dividends from investments, income from rental property or pension payments. You can only contribute up to your earned income.
The more you invest today, the more your investments will pay off in the future. If your IRA has already been open but hasn’t been maxed out for 2012, time is running out to do so. If you still haven’t opened up an IRA yet, do it. Go to www.Vanguard.com and pick a target retirement fund. You can always change your account holdings later.