Less a Burden Than an Opportunity

By Martha M. Hamilton
Sunday, March 9, 2008

Tax time forces you to think about the present, as in, "Whoa, I hope I'm not too late." But it can also be a great time to focus on the future.

Filing your taxes offers a real opportunity to plan for retirement. It's a time when you can boost -- or begin to build your retirement savings. Here are a few ways:

Split refund: The Internal Revenue Service now allows taxpayers to split their refunds into what J. Mark Iwry calls "a saving piece and a spending piece." In the past, the IRS sent the money back in one check, which, once in hand, tended to disappear. Now "you can tell the IRS to direct-deposit a portion of your refund to a checking account and the other to an IRA or other savings account," said Iwry, principal of the Retirement Security Project and a nonresident senior fellow at the Brookings Institution.

This is the second year the IRS has allowed the split refund, and now the popular tax-preparation software TurboTax will allow taxpayers to choose that option, Iwry said.

The average IRS refund is well over $2,000, according to Iwry. An extra $1,000 in the retirement account would be a substantial increase in annual savings for most of us. Even if you can't afford to save half of the refund, save what you can. When it comes to money earning more for your future, every little bit helps.

And remember, the federal government will be sending you another check in May that it wants you to spend to stimulate the economy. That should make it easier to put at least part of your tax refund into savings. The form to split your refund is No. 8888.

Savers credit: The retirement savings tax credit is another good reason to start saving for retirement. You qualify for the tax credit if your income is $52,000 or less for a couple or $26,000 for an individual and you contribute to an IRA before April 15. If you have contributed to a 401(k) plan in the previous year, you also qualify. The credit can be worth as much as $1,000 per individual or $2,000 per couple, depending on your income, and the amount is subtracted from what you owe. That makes it worth more than a deduction of the same amount, which would only reduce your taxable income.

The savers' credit has been used in more than 5 million tax filings a year, said Iwry. The form is 8880. If you can't save in time for the 2007 credit, do it in time to benefit next year.

Roth IRA: There are income limitations on opening a Roth IRA, but if you qualify, now is the time to open one. You can make a full contribution to a Roth IRA if you are single and your income is $99,000 or less. From $99,000 to $114,000 the amount you can contribute is reduced, and above $114,000 you are ineligible. If you are married and filing jointly, you can make the full contribution if your income is $156,000 or less, and a partial contribution up to a limit of $166,000.

The limit on contributions is $4,000 for 2007 and $5,000 for 2008. Filers who are 50 or older are allowed to contribute an additional $1,000 each year. You have until April 15 to contribute to a 2007 IRA.

Unlike traditional IRAs, you pay taxes on the money you put into a Roth. But once that money is there, everything it earns is tax-free. If you are young, and your money has many years to make more money for you, that can be a big advantage. Also, if you are young, chances are your taxes are lower than they will be in the future. But even if you are near or in retirement, Roths offer the advantage of tax diversity. For one thing, though the law requires you to make withdrawals from regular IRAs at age 70 1/2 , you can leave the money in your Roth as long as you want.

If you can't afford to put in the maximum contribution but want to open a Roth IRA, go ahead and do so. Even if you are 59 1/2 , the age for avoiding penalties on withdrawals, you can't take your earnings out tax-free until five years after you establish your Roth, so you want to start the clock running. You can take out your contributions -- the money you originally contributed -- at any time.

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