We are now a mere six weeks away from the spring tax deadline. It is a good time to review the opportunity for giving a boost to your retirement plan. You still have time to make a tax deductible or after-tax contribution to your own retirement plan.
APRIL 15 DEADLINE FOR 2010 CONTRIBUTIONS
Especially if your employer does not offer a retirement plan, and many do not, you can fund your own Traditional IRA or Roth each year... The limit is $5000 per year or $6000 if you are at least fifty.
POTENTIAL DOUBLING EVERY TEN YEARS
The younger you start saving in one of these accounts the greater potential for growth, assuming a seven percent compounded rate of return $1000 deposited today can grow to $2000 in ten years, $4000 in twenty years, $8000 in thirty years and $16000 in forty years.
It's simple math really. So it pays to start early, but no matter your age, something is better than nothing.
Subject to special rules, contribution to the Traditional IRA is generally tax deductible, to the Roth is not. Either way money contributed to an IRA or Roth grows protected from tax.
DEDUCTIBLE AND TAX DEFERRED VS. NON-DEDUCTIBLE AND TAX FREE
When you withdraw from an IRA after age 59.5 you are taxed at your marginal tax rate at the time of withdrawal.
Qualified distributions from a Roth after age 59.5 are not taxed.
If you are self-employed you might consider opening a simplified employee pension plan (SEP) or a solo 401k.
It is too late to open a solo 401k for 2010 contributions, but not for a SEP. The SEP set-up deadline is the tax filing date, plus extensions while the solo 401k deadline is Dec. 31 of the tax year in question.
The contribution limit for a SEP is $49,000 for 2010 and 2011. I will talk more about these employer plans in a future article.
As always, speak with your tax advisor concerning any action that could impact your individual tax picture. Look before you leap!
FAQ: HOW IS A SOLO 4O1K DIFFERENT FROM A REGULAR 401K?
As its name implies, a solo or individual 401k is for a one person or family business without other employees. It can be appropriate for a solo professional or tradesperson alike who employ only immediate family.
