It's Not Too Late To Get 2010 IRA Deduction

If you're preparing your 2010 taxes and wish you had at least one more good tax deduction, you're in luck. You still have time to make a deductible contribution to your Individual Retirement Account (IRA) and have it count against your 2010 income.

An IRA is a personal savings plan that allows you to set aside money for retirement, while offering you tax advantages. It's one of the best tax breaks there is, yet it is one that most taxpayers don't fully utilize.

You can set up different kinds of IRAs with a variety of organizations, such as a bank or other financial institution, a mutual fund, or a life insurance company. The original IRA is referred to as a "traditional IRA." A traditional IRA is any IRA that is not a

Roth IRA or a SIMPLE IRA. You may be able to deduct some or all of your contributions to a traditional IRA.

Deduction limits

How much can you deduct? It depends on your circumstances. For 2010, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

• More than $89,000 but less than $109,000 for a married couple filing a joint return or a qualifying widow(er),

• More than $56,000 but less than $66,000 for a single individual or head of household, or

• Less than $10,000 for a married individual filing a separate return.

For 2010, if you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $167,000 but less than $177,000. If your modified AGI is $177,000 or more, you cannot take a deduction for contributions to a traditional IRA.

If you are married and filing jointly, both you and your spouse may qualify for IRAs and can make deductible contributions for 2010, until April 15, 2011.

Possible $8,000 deduction

If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more of your traditional IRAs of up to the lesser of $5,000 ($6,000 if you are age 50 or older), or 100 percent of your compensation. This limit may be increased to $8,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year.

Not only is it not too late to make an IRA contribution for 2010, there is still time to set up an account, if you don't have one, if you do it by April 15, 2011. When depositing funds, be sure you specify that the contribution is for tax year 2010.

There is an age limit for setting up a traditional IRA. You must be younger than 70 1/2 by the end of the tax year. So, if you were under that age on December 31, 2010, you qualify.

The IRA deduction is one of the best for two reasons. First, it can give you a significant tax deduction every year, especially if both spouses make full contributions. Second, it is a great way to build wealth, since the contributions grow tax deferred. You don't pay taxes on the earnings until you begin to withdraw funds, at age 70 1/2.