Guest writer: W. Ben Utley CFP®
Your tax guy or financial advisor may have told you, “you can’t do an IRA.” But what they really meant to say is that you can’t deduct your contribution to your IRA, so why bother contributing in the first place? Here’s my answer.
1. You need some place to stash your bond fund. When you put a bond fund (or bonds) in a taxable account, the dividends (and interest) are taxed as ordinary income. You can shelter and defer that income by keeping your bond fund in your IRA, making your portfolio more tax-efficient.
2. You can’t (exactly) do a Roth IRA. But you can make a contribution to your Traditional IRA and then convert the Traditional IRA to a Roth IRA. If you already have a big fat Traditional IRA, this strategy won’t work very well for you, but if you have a little Traditional IRA or none at all, this is probably the only way you’ll get money into a Roth since most doctors don’t qualify to make direct contributions to a Roth IRA.
3.Your 401k is full. You can squeeze $17,000 ($22.5k if 50 or older) into your 401k or 403b this year, or up to $50,000 ($55.5k if 50 older) if you’re self-employed. Maxing out your IRA means more tax deferral and more money for retirement.
4. You might need the money later… like when you retire. The more you save, the more you’ll have when you need it. Why not max out your IRA? The limit for most doctors is $5,000 per year, or $6,000 per year if you’re 50+. If you’re married but you don’t have earned income, you can still make an IRA contribution based on your spouse’s wages or other earned income.
5. You might go bankrupt some day. You may be saying to yourself, “Not me!” And you’re probably right, but what if you’re wrong? The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 exempts your IRA contributions from the reach of creditors through the process of bankruptcy. Having guided one physician family through bankruptcy myself, I can tell you that the asset protection benefit from the IRA may make all the difference if something bad financially happens to you.
It’s not too late!
Right now, a physician family can stash as much as $10,000 in their IRA’s. That’s $5,000 for you and $5,000 for your spouse for 2012.
If you’re thinking about contributing to your IRA, do it NOW. It takes time to open an account and it takes time for your check to find its way into your account.
W. Ben Utley CFP® is a fee-only financial advisor and the president of Physician Family Financial Advisors Inc. Check out his website at www.physicianfamily.com or call him at 541-463-0899.