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TRADITIONAL IRAS: STILL A GOOD DEAL

April 09, 2008

The Individual Retirement Account became a red-headed stepchild of the tax law when Congress limited deductions for such accounts mostly to people with no money to save in them. Like all high-income phaseouts, the limitation of IRA deductions is bad policy and adds foolish complexity to the tax law.

But even within its limits, the traditional IRA can be a good deal for taxpayers. First, many taxpayers can deduct their IRA contributions. Your deduction is limited only if you are covered by another employer pension plan. Even if you are covered, your spouse may be eligible for a deduction. And even if you can't deduct an IRA contribution, money saved in an IRA can earn tax-deferred income from otherwise taxable investments.

You have until April 15 to make your 2007 IRA contribution of up to $4,000, or $5,000 if you were age 50 by the end of 2007, if you have at least that much 2007 compensation income.

You can deduct the contribution if:

- You and your spouse (if you have one) are not covered by any employer retirement plan during the year. Most of us can tell whether we are so covered by looking to see if the "retirement plan" box on our W-2 is checked.

- If you are covered by a retirement plan, you can use this chart to determine whether your 2007 contribution is deductible:

-If you aren't covered by a retirement plan, but your spouse is, use this chart:

IRA contributions can also qualify you for the savers credit, if your income is low enough. And the math is compelling: If you start young, you can build a terrific IRA nest egg through annual contributions.

Tomorrow: The Roth IRA

Link: IRS publication 590 on IRAs

This is another installment of our daily series of 2008 filing season tips running through April 15.

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