Funding a nest egg

James Jaillet | April 02, 2011

There’s still time to lower your 2010 tax bill. Pick the right retirement account to get the biggest bang for your bucks.

A brief window of opportunity remains for allocating money to a retirement fund to reduce your 2010 tax bill. For most owner-operators, that means adding to an individual retirement account by April 18. (The deadline was delayed this year because April 15 is designated for the District of Columbia’s observance of Emancipation Day, which falls on Saturday, April 16.)

“If you can find a way to get any money at all put into an IRA, it’s such a great deal,” says Mark Miller, tax consultant at ATBS, the nation’s largest owner-operator financial services company. “I still think it’s one of the best tax deductions, and you’re really not spending any money.”

Not all retirement account types are created equally, though. Factors such as your age, retirement goals, present and expected tax brackets, and the amount of money available to save are important considerations.

TRADITIONAL IRAS. Contributions to a basic IRA reduce your taxable income dollar for dollar for the filing year. Contributions of up to $5,000 can be made for individuals younger than 50 and $6,000 for those older than 50. Owner-operators with non-working spouses can make contributions on behalf of their spouses, doubling the allowable contribution.

The benefit of traditional IRAs is “the presumption that many years from now, you’re going to be in a lower tax bracket, which is the case with most people when they retire,” says Dennis Bridges, an accountant at the Atlanta-based eTruckerTax firm. “You get to take the deduction now, and when you withdraw the money when you’re 70 years old, you’ll be in a lower tax bracket when you pay taxes on it.”

Miller says owner-operators should contribute systematically to IRAs. “If there’s any way you can put just $25 a week into an IRA, you’re that much ahead of the game. Once 20 or 30 years go by, you’ll have a nice little nest egg.”

ROTH IRAS. Money invested in a Roth IRA does not reduce taxable income for the current filing year. When the money is withdrawn from the account, though, it is not taxable income. The money also grows tax-free, so any growth through interest, dividends or equity is not taxed upon withdrawal. Considering that long-term investments can easily double or triple in value, that can be a substantial tax savings.

Roth IRAs “make the opposite presumption” of traditional IRAs, Bridges says, in that some of those who invest in them anticipate being in a higher tax bracket later in life, which can be an ideal solution for young owner-operators. “If you want to start a retirement account but you don’t think you’re in your heavy earning years, a Roth IRA would make sense,” Bridges says.

Roth IRA rules for contribution limits and contributions for non-working spouses are the same as those for traditional IRAs, says Mary Beth Franklin, senior editor for Kiplinger’s Personal Finance magazine. When deciding between a Roth IRA and a traditional IRA, she says, simply think about when it would make more sense to get a tax break.

“If you’re in your 40s and in peak earning years, it usually doesn’t make much sense to put money into a Roth IRA,” she says.

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