By Catherine Gordon, CCH Financial Planning Toolkit Staff Writer
It's the time of year when most of us are all-too-aware that we should have filed our tax returns by now or are rushing to meet that April deadline. Even at this late date there's still a rare opportunity to take action and perhaps lower your 2005 tax bill and save for retirement at the same time. How? You can make a contribution to or set up a traditional individual retirement account (IRA).
An IRA is an extremely versatile and simple way to save for retirement. A traditional IRA is a domestic trust or custodial account that can be established by an individual in order to save money for retirement on a tax-deferred basis. And as an added bonus, some contributions may also be deducted from your taxable income.
To make matters even simpler, virtually every type of financial institution is able to set an IRA up for you. While many taxpayers already know of the special tax treatment for IRA contributions, this time of year is a particularly good one for a reminder. Why is this so? Because contributions to a traditional IRA can be made for a year at any time during the year or by the due date for filing the year's tax return (that's April 17 for 2006 because April 15 falls on a Saturday). Filing extensions are not counted.
Amounts you contribute to an IRA may be eligible for a full or partial deduction from your taxable income for the year of contribution. If you qualify, this provides an immediate benefit because of the tax savings it provides.
Generally, anyone who does not reach age 70.5 by the end of the year and receives taxable compensation during the year can set up and make contributions to an IRA. For 2005, the maximum that an individual can contribute to an IRA is $4,000. For those who are age 50 and over, an additional catch-up contribution of $500 is allowed in 2005.
However, it's important to note that the tax break you get for contributing to a traditional IRA depends on a number of factors, which may include your income level, filing status, and whether you are covered by an employer's retirement plan. Depending on these factors, you may be eligible for a full deduction, a partial deduction, or no deduction for 2005.
Moreover, if an amount is contributed between January 1 and April 17 for 2006, be sure to tell the IRA custodian which year (current or previous) the contribution is for. If the sponsor isn't informed, he may assume it is a contribution for the year received and report it as such to the IRS.
What if your contribution is nondeductible? Although your tax deduction for IRA contributions may be reduced or eliminated, you can still make a nondeductible contribution up to the annual limit. It's a prudent move because you still get the benefit of having your money grow toward retirement on a tax-deferred basis.
So get going and set up your IRA. It may be too late to make any more money in 2005, but it's not (yet) to late to save some more instead.
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Added to the news on March 22, 2006.
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