... older Americans
1. Don't count out IRAs just yet
After retiring early, you may start doing some consulting or part-time work. Strategy: Contribute up to $3,000 to an IRA. As long as you're under 70 1/2 at year-end and collected earned income in 2003, you can still contribute to an IRA for this year. (You can make your contribution up until April 15, or your extended filing date.) And since you're in semiretirement, you may be in a line for the new retirement saver's tax credit. Alternatively, you can allocate part or all of your contribution to a Roth IRA.
2. Launch a second IRA for your better half
It took years to build your business, but now you need to maximize your retirement savings. Strategy: Hire your spouse to help around the office. That way, your spouse can set up a separate IRA. Your spouse's annual IRA contribution is limited to $3,000 or your total compensation, whichever is lower.
3. Make up lost ground on retirement savings
Don't forget about a retirement tool Congress established just for people like you. Strategy: Besides the typical $3,000 IRA contribution, people age 50 and older can pump in an extra $500 "catch-up contribution" each year. That can help you close the gap on your retirement savings.
Note: The maximum IRA contribution increases to $4,000 per year for 2005 through 2007, then to $5,000 for 2008 and beyond. Catch-up contributions remain at $500 for 2004 and 2005, then jump to $1,000 for 2006 and beyond.
4. Hand a youngster a tax-saving boost
It may be too late for you to deduct IRA contributions if you exceed the income limits. But it's never too early to jump-start the younger generation.
Strategy: Give your teen child or grandchild a gift of $3,000. As long as the child earned money in 2003, he or she can typically contribute all or part of the gift to a Roth IRA.
Assuming an 8 percent interest rate, the contribution will provide $32,807 in retirement savings after 30 years. From your perspective, the gift qualifies for the annual gift-tax exclusion.
Note: The cash deposited in the Roth IRA doesn't have to be the same money given to the child, but the funds must be deposited by the April 15 deadline.
... and younger Americans
1. Max out all your IRA benefits
If you recently started your career, saving for retirement probably isn't a top priority. Strategy: Take our advice and give until it hurts—up to $3,000 in your IRA. For 2003, contributions are fully deductible against your taxable income unless you're an active participant in an employer-sponsored retirement plan and your joint adjusted gross income (AGI) exceeds $60,000 ($40,000 for unmarried filers). The deduction is reduced incrementally until it is reaches zero for couples with an AGI over $70,000 ($50,000 for unmarried filers).
If your spouse participates in an employer plan and you're not, your IRA deduction phases out if your joint AGI is between $150,000 and $160,000.
2. Let Uncle Sam treat you to a contribution
Coming up short scraping up the money for an IRA contribution? Don't dip into your own pocket. Strategy: File your tax return as early as possible in 2004 and claim an IRA deduction (without actually plopping down the money). Then use the tax refund from Uncle Sam to actually fund part of the contribution.
Yes, it's legal; the IRS approved that strategy in a little-noticed ruling. (IRS Revenue Ruling 84-18) Just make sure you actually deposit the IRA contribution by April 15, 2004.
3. Borrow IRA funds from yourself tax-free
If you aren't able to file your tax return early—or you're not entitled to a large refund—here's another creative way to fund an IRA contribution. Strategy: Borrow the money from your existing IRA.
As long as you pay the exact amount back to the IRA within 60 days, the transaction is treated as a tax-free rollover. As with Strategy #2, you must actually make the 2003 IRA contribution by April 15.
4. Double your IRA pleasure this year
The more money you salt away in your IRA at an early age, the bigger the pot when you retire. Strategy: Double up on your IRA contributions this year. For instance, you can contribute $3,000 to an IRA in January for the 2003 tax year and add another $3,000 that same day for your 2004 tax year. Let's say you make two $3,000 contributions this year and earn an annual rate of 8 percent on the second contribution over the next 30 years. That produces an extra $32,807 in your account.
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