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Gail MarksJarvis: Itís not too late to cut your taxes by opening an IRA

McClatchy-Tribune Information Services

April 18, 2016


Thereís still time to cut your taxes before turning in your 2015 tax return April 18.

You can open an IRA and get a tax deduction. In addition, that IRA will help move you to where most Americans need to be ó making more progress accumulating the money they need for retirement.

To get a deduction, open a traditional deductible IRA. For the maximum deduction, put $5,500 into an IRA if you are under 50 and $6,500 if you are 50 or older. If you have a small business, you can save even more in a SEP IRA and enhance your deduction, but the amount depends on the income youíve earned in the business.

But keep in mind, while $5,500 and $6,500 are the maximum contributions for individuals, you donít need to commit that much if itís more than you can handle. You can open an IRA with $100, or even less. Yet the larger your contribution, the larger your deduction. Assume you are in the 25 percent tax bracket and put $4,000 into an IRA for 2015. That will entitle you to a $1,000 deduction. You multiply $4,000 by 25 percent.

Individuals can open deductible IRAs, regardless of their income, if they have no retirement plan at work, such as a 401(k). But even those with workplace plans will be able to open an IRA and use it for a tax deduction if their income is low enough. The cutoff is a modified adjusted gross income of $71,000 for individuals and $118,000 for couples.

If you are after a tax deduction, donít open a Roth IRA. That type of IRA doesnít allow people any deduction. But if you donít need a tax deduction, the Roth may come in handy at retirement. At that point, anything you have saved for your future in a Roth IRA will be yours free and clear. Provided youíve followed the rules, after age 59 1/2 you wonít have to pay taxes on anything you take out of a Roth for living expenses or fun. So if you end up with $1 million after years of saving in a Roth IRA, every cent will be yours. Uncle Sam wonít be entitled to any of it.

Thatís not true about deductible IRAs. When you retire and start removing money from a deductible IRA, Uncle Sam shows up each year at tax time to get some of it. Thatís the trade-off for the right to take a deduction on your taxes when younger and putting money into deductible IRAs.

The choice between a deductible IRA and Roth IRA can be overwhelming. The traditional advice is: If you think you will be in a lower tax bracket when you retire, get your deduction now from a deductible IRA. The idea is to nab the tax deduction because it will do you more good than having tax-free income from a Roth later in life.

On the other hand, IRA expert and certified public accountant Ed Slott says, "There is nothing like a Roth." He suggests opening a Roth if you donít need the deduction from a traditional IRA now because your future taxes might not end up as low as you think. As the government tackles the nationís debts, taxes could go up. And even if there are no oppressive taxes awaiting you in retirement, Slott notes it will be comforting to have a stash of money that will all be yours without Uncle Sam touching a cent.

Whether you open an IRA or Roth IRA, note the deadline of April 18. You can open the account at a brokerage firm such as Charles Schwab, Scottrade or TD Ameritrade, or a mutual fund company such as Fidelity, Vanguard or T. Rowe Price.

Once you open the account and deposit your money, you will have to invest it. But if investment decisions are overwhelming as the clock ticks toward the April 18 tax filing deadline, thereís nothing wrong with parking the money temporarily in a money market account at the fund company or brokerage firm. Thatís like a savings account. And you can take some time to consider what investment to use.

Another alternative would be to open the IRA or Roth IRA at so-called robo advisers such as Betterment or Wealthfront. Youíll pay a relatively low fee, 0.35 percent or less, and they invest money for you based on how you feel about taking risks in the stock market and your age.

If you go to a brokerage firm or mutual fund company, you can put money in a fund for your retirement date. So for example, if you will be 67 and retiring in 2050, you might choose the Vanguard Target Retirement 2050. It would charge you about 0.16 percent and invest your money like this: 54 percent in U.S. company stocks, 35 percent in stocks around the world, 10 percent in bonds, and about 1 percent would stay in cash. Thatís aggressive, aimed at young investors who should benefit from the stock market growing over time, although it could plunge in the short-run. If you are closer to retirement and want less risks in stocks, choose a fund for someone older, maybe one with 2030 as a retirement date. The date doesnít mean you have to retire then. Itís just a guideline for investing choices.

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