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Still Time to Save on Taxes With IRA

It’s crunch time, but you may still be able to cut down your tax bill by making a last-minute deductible contribution to a Traditional Individual Retirement Account.

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“You have until the [April 18] tax deadline to actually make the 2010 contribution,” says Maria Bruno, an analyst in Vanguard’s Investment Strategy Group. (You can file your return before a contribution is made but the contribution must generally be made by April 18).

Here’s how it works: Investors under the age of 50 can contribute up to $5,000 to a qualifying IRA account. That limit gets bumped up to $6,000 if you’re 50 or older. In order for the full IRA contribution to be tax-deductible, you must either not participate in a retirement plan with your employer. If you do participate in an employer plan, you must make less than $56,000 as a single filer or less than $90,000 as a married couple filing jointly to qualify for the full deduction. Married couples who make less than $110,000 and single filers who make less than $66,000 can qualify for partial deductions.

Just how much can you save? It depends on your tax bracket. Take someone in the 25% tax bracket who makes the maximum $5,000 contribution. He or she could get a tax deduction of about $1,250. “So you’re reducing your taxable income by that much,” says Bruno, and added that you may be able to double that deduction by making a contribution for your spouse.

Don’t qualify for the deduction? There are a few longer-term tax savings strategies within reach. You can still start contributing to a Traditional IRA and benefit from tax-exempt earnings growth.

Or you can consider putting the money into a Roth IRA. While your contributions are taxed, you do get the benefit of withdrawing tax-free income in retirement. You can contribute up to $5,000 directly to a Roth IRA, but that amount is phased out for married couples who earn between $169,000 and $179,000 and for single filers earning between $107,000 and $122,000.

Even if you make too much to contribute to a Roth IRA directly, you can use a maneuver called a back door Roth IRA contribution. This involves making a non-deductible contribution to a Traditional IRA and then immediately converting the funds to a Roth IRA. But you may have to pay taxes if you already have other IRA savings.

And if you’ve already filed your taxes or don’t want to rush your decision, “you can start funding the accounts for next year as well,” says Christine Benz, director of personal finance for Morningstar.

Readers, are you making an IRA contribution this year? What other last-minute strategies are you considering?

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    • We earned too much money to contribute to our Roth IRA this year. However, next year we will, in part because a large contribution to a chariety. I love giving appreciated assets to those who need funds. Sure helps on the tax side. Wish you would write something about this.

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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