Traditional IRAs make tax sense for some filers

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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 thanks to a deduction that doesn’t require itemizing.

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 2007 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 2007 contributions and are planning your 2008 taxes, you can put in a bit more this tax year. The general IRA deduction limit goes to $5,000; the additonal $1,000 for 50-or-older filers still applies. And some taxpayers might be able to contribute up to $7,000 if they participated in a 401(k) plan and the employer that offered the retirement account went into bankruptcy in an earlier year.

Before the lure of lower taxes prompts you to open a traditional IRA, be aware that a $4,000 (or $5,000 for 2008) 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 because 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 April 15 filing deadline 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 2007 returns, a single or head-of-household filer with a company-provided pension plan can earn up to $62,000 and still get a partial IRA deduction. The earnings cap is $103,000 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 — $166,000.

The work sheet in both the Form 1040 instructions, or the 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 the $4,000 limit ($5,000 in 2008).

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 70? 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 April 15 to decide which is best for you.