IRA investments can reduce tax burden

If you’re thinking it’s too late to do anything about your tax liability for 2003, think again.

Most taxpayers have until April 15 to make IRA contributions that not only help them save for retirement but may also reduce their 2003 taxes.

“Basically, the rules state that they have until the due date of their return to make their contribution,” said Bernie Rundstrom with Rundstrom Accounting in Canton. “That’s one thing they can do after the end of the year that could help them reduce their tax burden.”

IRAs come in all shapes and sizes, and there are plans for self-employed taxpayers as well as those who work for someone else.

Traditional and Roth IRAs

Depending on income and participation in employer-sponsored retirement plans, taxpayers may be able to take a tax deduction for all or part of their contribution to a traditional IRA plan.

The traditional IRA plan also allows taxpayers to defer taxes on IRA earnings until they are withdrawn.

Tax law changes in the last several years have eased some of the onerous requirements of this IRA plan, and the limits have been raised to levels that permit more taxpayers to take advantage of the IRA deduction.

For 2003, IRA deductions are reduced at $60,000 of adjusted gross income for joint taxpayers and totally phased out at $70,000 of AGI.

Taxpayers who are unable to deduct contributions to a traditional IRA may find a Roth IRA works best for them.

Contributions to a Roth IRA are not tax deductible but the plan offers the attractive features of tax-free earnings and tax-free withdrawal for certain distributions after a five-year holding period.

The maximum dollar contribution is the same for both the traditional and Roth IRAs-$3,000 plus an additional $500 “catch up” contribution if you’re at least 50 years old.


True to its name, the Simplified Employee Pension plan was designed as a simple way for self-employed people and small-business owners and their employees to save for retirement tax-free.

Under a SEP plan, an employer establishes a traditional IRA for each qualifying employee.

Anyone who is self-employed either full-time or part-time may establish a SEP, and sole proprietors and partnerships may have SEPs even if there are no employees.

Rundstrom said many self-employed people have found the SEP an excellent way to save for retirement, because the amount that may be contributed to a SEP is much greater than the amount that may be contributed to a traditional or Roth IRA.

Up to 25 percent of compensation may be contributed to a SEP plan-as much as $40,000 for the 2003 plan year, he said. The contribution is tax deductible in the tax year for which it is made, and any investment earnings grow tax-deferred until withdrawn.

Regardless of which type of IRA a taxpayer selects, “it’s a good thing to do,” Rundstrom said.

“For instance, if somebody’s in a 15 percent (tax) bracket, if they contributed $1,000 that would save them $150 plus 5 percent more of Kansas tax-so 20 percent basically. That’s a pretty good return on your first year investment,” he said.

“If they would take that 20 percent and put it right back in the IRA, the 20 percent tax savings they would have given Uncle Sam goes to work, too,” he added. “The compounding of the investment over the years can mount up quite a bit, too.”

Saver’s Credit

An added benefit awaits taxpayers with joint AGI of $50,000 or less -$25,000 for single taxpayers-who make contributions to IRAs or qualified employer plans for tax years through 2006.

As an extra enticement to save for retirement, the government is offering a Retirement Savings Contributions Credit or Saver’s Credit.

The program provides a tax credit of 10 to 50 percent of the dollars that eligible taxpayers contribute to a 401(k) plan, 403 (b) annuity, 457 plan, a SIMPLE, a SEP, or to a traditional or Roth IRA. The credit is on top of the tax deduction provided on the contribution.

For example, if your joint AGI is $30,000 or less and you put $2,000 into an IRA for 2003, you don’t have to pay taxes on $2,000 of income, plus the IRS will let you deduct 50 percent of your contribution, or $1,000, from your tax bill.

“That’s a direct credit against your tax,” Rundstrom said. “It’s a super, super deal for those who meet the income requirements.”

The credit has the potential of erasing a person’s income tax liability altogether.

Eligibility for the program depends on filing status and AGI, and it applies only to retirement plan contributions of up to $2,000 per person. A couple filing a joint return could be eligible for a tax credit of $1,000 each.

Making a decision

Rundstrom said the decision to invest in an IRA depends more on an individual’s situation than it does their age.

“It really depends on what other assets they have and what their goals are,” he said.

Loren Funk, senior financial adviser in Waddell & Reed’s Hillsboro office, said no one should pass up the opportunity to save money tax-free.

“It is just an absolute must,” he said. “People are going to have to put money aside. They absolutely need to look at taking advantage and putting in the maximum they can into SEP IRAs or into regular IRAs.”

Funk said potential changes to the Social Security laws make individual saving for retirement more important than ever before.

“For most people, particularly in farming communities, the farm will not fund their retirement. They’ve got to have a cash flow-they have to have something compounding for them,” he said. “They might as well take advantage of the tax writeoffs if they’re going to accumulate dollars.”

If the alphabet soup of IRAs and SEPs confuses you, don’t give up-there are plenty of experts out there to guide you through the maze. Help is as near as your local bank, credit union, tax accountant, broker or investment advisor.

Funk said he tries to help people select the IRA that is right for them.

“I go through a series of questions as to what their tax bracket is, how much earned income they have, whether this is money they are going to use for retirement or if this is money they would like to pass to the next generation,” he said.

Setting Up An IRA

To set up an IRA, taxpayers must go to a financial institution such as a bank, savings and loan association, insurance company, credit union, brokerage firm, or regulated investment company.

Depending on the institution and what it offers, contributions may be put into stocks, mutual funds, money market funds, savings accounts and other similar types of investments.

“We probably have 30 some different investment options,” Funk said. “You can go into balanced funds, growth funds, technology funds, international funds, small cap funds, global value funds, European funds-there’s just a real variety of investments.

“The choice depends upon their risk tolerance level. Normally I do a questionnaire to determine that factor.”

Funk said the paperwork required to start an IRA is relatively easy to complete.

“It’s just name, address, Social Security number, who they want as beneficiaries, and who they want as a contingent beneficiary,” he said. “Then it’s just a matter of what they want to put in.”

“People fail to realize it doesn’t take much to start an IRA account,” he said. “Yes, for last year you don’t have much time until you file your income tax to put in your maximum contribution. But for 2004, you can put it in as a lump sum at the beginning of the year and let it compound all year or you can add money on a monthly basis.”

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