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Uncle Sam Season

It's Uncle Sam season and if you've not contributed to a traditional IRA yet, below are some points to ponder gleaned from editor and columnist Sue Stevens, a CFA, CFP, and CPA at Morningstar.

A traditional deductible IRA allows you to put money away on a pretax basis --- meaning you won't have to pay tax on that money before you invest it and as such can let it grow tax-deferred over time. When you eventually take money out of a traditional IRA, you pay tax on the distribution at ordinary income tax rates posted at that time.

If you are eligible to contribute to a traditional deductible IRA, you get to take a deduction on your tax return for that contribution. To be eligible, you must:

  • Have earned income or alimony income.
  • You can't contribute more than you get in earned income or alimony. (The exception to this rule is for spouses who are not working outside of the home. In that case, the spouse may make an IRA contribution even without income of his or her own. This is called a "spousal" IRA.)
  • f you don't participate in a company retirement plan (and neither does your spouse), the amount you can deduct for your IRA contribution may still be limited by your earnings. (See IRS Publication 590, Pages 14-15, for details.)
  • If you do participate in a company retirement plan (such as a 401[k], 403[b], SEP, SIMPLE, etc.) and your income is too high, you may not be able to make a full deductible contribution to a traditional IRA.( See IRS Publication 590, Pages 14-15, for details.)
  • The maximum contribution is $4,000 for 2006-2007. If you are older than age 50, you can contribute another $1,000 for a total of $5,000.
  • You can make contributions to an IRA in the year the income is earned or up to the filing deadline of your tax return---that's April 17 this year.
Remember, Stevens says that even if your income is too high to make a traditional IRA contribution, you can still make a nondeductible one. So while you won't get a tax deduction, you will get tax-deferred benefits.

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