Your 2008 tax returns are due on Wednesday, April 15, and that’s also the last day you can contribute to an IRA for 2008. Even if you’ve already made your IRA contribution, you may have overlooked other ways to boost your retirement savings. Making the most of these tax-advantaged opportunities to save for retirement can be particularly helpful this year, especially if your accounts have lost value or your employer cut back on its 401(k) match.
1. You can still contribute to an IRA. You have until April 15 to put up to $5,000 (plus an extra $1,000 if you are 50 or older) into an IRA for 2008. You can contribute to a Roth IRA if your adjusted gross income for 2008 was $116,000 or less, or $169,000 or less if married filing jointly (the contribution amount starts to phase out if you earned $101,000 or more if single, or $159,000 or more if married filing jointly). If you usually earn too much to qualify for a Roth but your income dropped last year, you might make the cutoff for 2008.
The Roth is particularly valuable because you can withdraw your contributions at any time without taxes or penalties, and you can take out all of the money tax-free after age 59½ -- helping to stretch your retirement savings further.
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For more information and advice for getting started, see Why You Need a Roth IRA.
2. Take a back door into a Roth. If you don't have a traditional IRA and earn too much to qualify for a Roth IRA, consider opening an IRA this year so you can convert to a Roth next year. Now, you can convert a traditional IRA to a Roth only if your adjusted gross income is less than $100,000 (whether married or single). But that income limit for conversions disappears in 2010.
If your IRA consists of only nondeductible contributions, you will owe taxes only on the earnings when you convert to a Roth. But if your IRA holds a mix of both deductible and nondeductible contributions -- which is more likely -- only a portion of any amount you convert to a Roth IRA will be tax-free. For example, say you have a traditional IRA that contains $50,000, of which $40,000 represents tax-deductible contributions and $10,000 in after-tax contributions. When you convert to a Roth, only one-fifth of any amount you convert will be tax-free. The remainder is taxed at your regular tax rate. And no, you can't cherry-pick and convert only the after-tax money to a Roth IRA.
Once you make the conversion, though, the money in the Roth grows tax-free, has no required minimum distributions and can be left tax-free to heirs.
For more information about this strategy, see Congress Opens the Door to Roth IRAs for Everyone.
3. Contribute to an IRA for your spouse. If you work but your spouse doesn't, you can contribute to an IRA on his or her behalf -- up to $5,000 for 2008 (plus an extra $1,000 for people 50 and older). To qualify for a spousal Roth IRA, the adjusted gross income on your joint return still needs to fall below the Roth cutoff.
See Contribute to an IRA for Your Spouse for more information.
4. Open an IRA for your kids. If your kids have earned income -- even if it's just from baby-sitting, mowing lawns or a summer job -- they can contribute to a Roth IRA, up to the amount of their earned income for the year (or $5,000, whichever is lower). And you can give them the money to do it. They can access the contributions at any time without penalty or taxes and can withdraw up to $10,000 of the earnings tax- and penalty-free to buy a first home after the account has been open for five years.
And then they can withdraw all of the earnings tax-free after age 5½. If an 18-year-old invests $1,200 now and the investments return 8% per year (which is still lower than the average annual return over such a long time period), that one contribution can grow to more than $44,000 by the time he's 65 - giving your child an amazing head start on the future.
For more information, see Why Your Kids Need a Roth IRA and Can Your Child Open a Roth IRA?
5. Contribute to a Simplified Employee Pension. If you had any income from self-employment in 2008 -- whether from running your own business or just doing some freelance work -- you have until April 15 to contribute to a SEP account for 2008. Not only does this money grow tax-deferred for retirement, but also your contribution lowers your taxable business income. You can contribute up to 20% of your net self-employment income (which is income minus half of your self-employment tax) to a SEP, up to a maximum of $46,000 for 2008. The deadline is October 15, 2009, if you get an extension for filing your 2008 tax return.
For more information, see Do-It-Yourself Retirement Plans and Tax Breaks for the Self-Employed.
To find out the best procedure for making a last-minute contribution, contact your brokerage firm or fund company as the deadline for 2008 approaches.
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