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When it comes to individual retirement
accounts, you have several choices. All offer some tax
savings. The big difference is when, exactly, you get
those savings.
For some people, a traditional IRA still
has a lot of appeal. These taxpayers find that this
type of savings plan helps build tomorrow's nest egg
while reducing today's taxes.
Dollar
limits
Single filers who have no company retirement plan can
contribute -- and deduct from their taxes -- up to $4,000
they put in a traditional IRA for the 2006 tax year.
Married couples filing jointly and who
have no employer-provided plans can deduct up to $8,000
in contributions, $4,000 in separate IRAs for each partner.
The contribution limits are even better
for workers age 50 or older. They can sock away an extra
$1,000 each tax year.
If you've already made your 2006 contributions
and are planning your 2007 taxes, the same limits apply this year.
Before the lure of lower taxes prompts
you to open a traditional IRA, be aware that a $4,000
contribution won't automatically cut your tax bill by
that much. Rather, at the bottom of Form 1040 or Form
1040A you subtract your contribution amount from your
income to come up with your adjusted gross income and
then you figure your tax bill. But the less taxable
income you have, the smaller the check you have to send
to the Internal Revenue Service.
OK, even though it's not a direct contribution-to-write-off
situation, you've determined that a traditional IRA
is a good move, but you don't have the money right now.
No problem. Just becasue the tax year ended on Dec. 31, that doesn't mean your annual contribution opportunity stopped then, too.
The allowable contribution amounts can
be deposited into your traditional IRA as late as the
filing deadline -- April 17 this year -- and still count
toward cutting your current tax bill. You even can file
your return before you make your contribution.
Just be sure you actually put the money
in your account by the April deadline. Remember: The
financial institution that manages your IRA sends account
activity information to Uncle Sam as well as to you.
Income
limits
Of course, for every rule that makes it easier to contribute
to a traditional IRA, there are others that complicate
the deduction process.
If you or your spouse have a retirement
account at work, including a 401(k) plan option or a
Keogh or SEP-IRA for self-employment income, you might
not be able to take the full tax break of a traditional
IRA. But all immediate tax savings may not be lost.
Some of your traditional IRA contribution still might
be deductible, as long as your income is below IRS limits.
For 2006 returns, a single or head-of-household
filer with a company-provided pension plan can earn
up to $60,000 and still get a partial IRA deduction.
The earnings cap is $85,000 for joint filers where each
partner has a company retirement plan. If you don't
have a company plan but your spouse does, the modified
adjusted gross income limit before you lose your full
deduction is even higher -- $160,000.
The work sheet in both the Form
1040 instructions, or 1040A
booklet if you file that form, will help you figure
out how much of your contribution you can deduct.
Other
IRA considerations
Employer-sponsored retirement options aside, keep in
mind that you might not be able to max out your IRA
contribution at $4,000.
You can only contribute, and potentially
deduct, as much as you earn. If you make $3,800 this
year, then that's the most you can put in any IRA.
And if you're 70½ or older, you can't
put any more money into your traditional IRA. In fact,
that's the age when the IRS
demands you start taking money out of your traditional,
tax-deferred retirement account.
So is a traditional IRA right for you?
Only a thorough examination of your overall financial
and tax circumstances can tell. Do your homework, and
look at the earnings potential and tax savings -- now
and in the future -- of each IRA type. You've got until
the tax-filing deadline to decide which is best for
you.
Freelance writer Kay
Bell writes Bankrate's tax stories from her home in
Austin,
Texas, and blogs on tax topics at Don't
Mess with Taxes.
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