By Catherine Gordon, Toolkit Staff Writer
Once again the tax crunch time of year has officially arrived. If you're one of the many that has not filed your tax returns yet, we know you will be rushing to meet that April deadline. However, don't lose sight of the fact that there's still time to take action and save for retirement--and lower your 2006 tax bill as well. You can do this by making a contribution to or setting up a traditional individual retirement account (IRA).
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. Virtually every type of financial institution is able to set an IRA up for you. And adding to the appeal of an IRA is that some contributions may also be deducted from your taxable income.
Even if you are aware of the special tax treatment for IRA contributions, this is a reminder that annual contributions to a traditional IRA can be made at any time during the year or by the due date for filing the year's tax return (filing extensions are not counted). This year, taxpayers will have until Tuesday, April 17, 2007, to file 2006 individual tax returns and pay any taxes due. The traditional April 15 filing date was extended for 2007 because April 15 falls on a Sunday and the following day, April 16, is Emancipation Day, a newly instituted legal holiday in the District of Columbia.
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 2006, 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 $1,000 is allowed for 2006.
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 2006.
If an amount is contributed to an IRA between January 1 and April 17, 2007, 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. Even without the tax deduction, you get the benefit of having your money grow toward retirement on a tax-deferred basis.
The clock is ticking so get going and set up and/or fund your IRA.
- Related items:
- Over $2 Billion in Unclaimed Refunds From 2003 Faces Looming Deadline
- IRS Cautions Taxpayers About Tax Scams
- Taxpayers Making Costly Mistakes When Claiming Federal Telephone Excise Tax Refund
- Income Tax Filing Deadline Changed by IRS
- IRS Touts Program for Free Filing of Tax Returns
- IRS Begins Tax Season With Important Issues Unresolved
- IRS Officials Highlight Tax Return Changes For Individuals
Added to the news on April 2, 2007.
|
