Your IRA and You - What's New

Now that the new year is in full swing, it's time to turn our attention to -gulp- taxes. If you are in the USA and you qualify, you can still contribute to your IRA until April 15 for 2004.

Why should you contribute to an IRA? Two significant tax advantages, that's why.

First, money you contribute to an IRA may be fully or parly deductible, depending on which type of IRA you have, and on your particular circumstances. Or, in plain English, if you qualify for the deduction, you'll pay less in taxes this year.

Second, the money in your IRA is not taxed until you take it out. Gains and earnings build up faster, meaning your nest egg should be larger when it's time to start collecting. In some cases, you may not pay taxes at all.

So what new wrinkles have our favorite politicos cooked up for us this year?

For tax year 2004...

Increased the income limits for traditional IRAs.

Increased the limit on salary reduction contributions under a SIMPLE (Simplified Investment Matching PLan for Employees, a plan similar to a 401(k) typically used by small businesses). If you aren't covered under one of these plans, don't worry about it.

The so-called "catch up" plan allowing additional contributions if you're over 50.

For tax year 2005...

Increased the contribution and deduction limits for traditional IRAs, including a "catch up" allowance if you're over 50.

Increased Roth IRA contribution limits, also including a "catch up" allowance if you're over 50.

Increased the income limits for traditional IRA contributions.

Increased the limit on salary reduction contributions under a SIMPLE.

Something else I just learned about is a flat-out tax credit for contributing to an IRA. Credits are better than deductions because they reduce the tax you pay dollar-for-dollar. Deductions reduce your taxes based on your tax rate.

For example, a $100 tax credit cuts your tax payments $100. A $100 deduction, if you're in the 28% bracket, cuts your taxes $28.

More information on these changes to your IRA, as well as a worksheet to figure your IRA tax credit, can be downloaded here (zip file) as well as from www.irs.gov.

This article is for information purposes only. Please consult the appropriate IRS publications and/or qualified tax professionals to address your unique IRA situation.

More IRA resources...

New IRAs and How to Make Them Work for You

Parlay Your IRA into a Family Fortune

Roth to Riches: The Ordinary to Roth IRA Handbook

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