2013 Tax Planning with Retirement Plans

January 30, 2014

It’s not too late to change your mind on 2013 IRA and other retirement plan decisions. Most people know that you can make traditional IRA and certain other retirement plan contributions by April 15, 2014 (and possibly later) and still get a deduction on your 2013 tax return. Individuals with self-employment income (those that are actually self-employed, but also those with self-employment income from partnerships or LLCs) can even wait until after year-end to both set up and contribute to certain retirement plans, allowing a deduction of up to $51,000.

Did you know that you can also undo the impact of a late 2013 decision to withdraw money from an IRA or other qualified plan? If you now find yourself in the position of not needing the money that you withdrew and want to avoid taxes on that withdrawal, you can roll the money into an IRA. But this has to be within 60 days of the withdrawal. So a withdrawal on December 15 has to be transferred into a traditional IRA by February 13.

You can also still back out of a conversion of your traditional IRA to a Roth IRA. For example, if you find out that in 2014 you will be in a lower tax bracket than in 2013, you might want to wait and have the conversion be effective in 2014 when the tax bite will be smaller. Or maybe the value of the underlying investments has dropped considerably in 2014 and you’d rather have the conversion at a time when the values are low to reduce the tax impact. You have until April 15 (and beyond if you extend your return) to change your mind.

Another opportunity is to change a 2013 Roth IRA contribution into a traditional IRA contribution. Roth IRA contributions are not deductible, while traditional IRA contributions generally are. While Roth IRAs have their advantages over traditional IRAs, a deductible IRA contribution can have a compounding effect on taxes due by providing both a deduction and reducing the negative effect of certain deduction phase-outs. For example, itemized deductions can be phased out when income is too high, but a deductible IRA contribution would serve to reduce income, allowing more itemized deductions to be utilized.

As you can see, tax planning for 2013 is not necessarily over. You can still take some steps with retirement plans to increase tax savings. Please contact us to find out more about these opportunities, as most require some rather technical considerations to make them effective.