Answers to your Tax Planning Questions

I put $2,000 into my IRA in early April and took a deduction for this amount on my 2000 tax return. Can I go ahead and deposit money now for my 2001 IRA contribution or do I have to wait until next spring? C.I. via e-mail.

You can deposit money in your IRA for the year 2001 at any time from January 2001 through April 15, 2002. Any money you deposit now will be considered a 2001 contribution. If you make a deposit between January 1 and April 15, you must specify for which year you are contributing - since the IRS allows this time as a grace period for contributions for the prior year.  

Right now the contribution limit for IRAs (both traditional and Roth) is $2,000 per year. You cannot deduct any amount contributed to a Roth IRA. Whether or not you get to take a deduction for the amount you contribute to a traditional IRA depends on various factors such as how much you earn, your marital status, and whether or not you participate in a pension plan at your job.  

It's a shame the rules for IRAs are so confusing, because people should be encouraged to save for their retirement. Instead the government seems to make the entire process difficult. Don't forget that everyone who has at least $2,000 of earned income can contribute up to $2,000 each year to a traditional IRA, even when the rules prevent a deduction for the contribution.  

Congress is working toward changing the IRA rules. The House of Representatives will be voting on a bill next week that will allow individuals to contribute up to $5,000 per year to IRA accounts instead of the current $2,000. This amount would be phased in over three years, and then indexed for inflation.  

There is a good likelihood that this bill will pass, as there is a lot of bipartisan support in both chambers of Congress, and President Bush has indicated his support of the bill as well.  

What does this mean for taxpaying Americans? With luck, you aren't waiting for Congress to give you the green light to save additional money for retirement. The limits set by Congress only affect the amount of money you can place into certain types of accounts which receive favored tax treatment.  

There are no limits to the amount of money you can place into other types of investment accounts. Don't feel you can only save $2,000 per year for retirement because that is all the IRS allows you to deduct. Contact a financial advisor and look into other savings and investment options.  

If you are living on a shoestring when you retire, pointing your finger at the government and saying, "But you only allowed me to save $2,000 per year," won't give you much satisfaction if you can't pay the bills. Wouldn't it be better to be able to say, "Look how comfortable I am since I ignored your stingy limits and saved all the money I needed for retirement!"  

The original IRA account was designed to encourage people who weren't saving anything to start putting away a bit for retirement. The tax-favored status of the account allowed a person to deduct the amount of the annual contribution (a maximum of $2,000) from taxable income on the income tax return. This deduction, however, is only a deferral - when the investor ultimately withdraws money from the account there will be tax to pay. A traditional savings account or a money market fund doesn't give you the tax deferral - but years from now when you withdraw the money you will have already paid tax on it, so there will be no additional income tax to pay. (Depending on the type of investment, there may be some capital gain tax to pay.)  

There are many saving vehicles available for people who want to start saving towards retirement, and there are many advisors who can assist in this area. If you're not sure where to start, you can go to the Indiana CPA Society's Web site, www.incpas.org, and select the Find a CPA option. With this feature, you can indicate a preferred service, such as financial planning-personal, or budgeting/planning, and search for someone in the area where you live. You can also ask for referrals from trusted friends and family members who may be able to steer you to someone who can help you get your investments organized.  

Don't wait for the government to dictate how you should save your money!