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Makin' Money

Tax Tip: Fund your retirement piggy bank

Chris Farrell Apr 8, 2011

Tax Tip No. 1: Fund Retirement Savings. It’s the procrastinator’s ultimate last minute tax break (if you qualify). The tax code has changed a lot over the years, but going through our archives this suggestions it pops all the time.With good reason.

You have until April 18 to fully fund your tax-qualified retirement savings plan for 2010. The contributions reduce your tax liability. If you already have a plan established you can put money for 2010 into the various kinds of IRAs, sole-401(k)s, and the like. .

Don’t have a retirement savings plan yet? The good news is that you still have until April 18 to open up an IRA. The maximum contribution into a traditional IRA for 2010 is $5,000 ($6,000 if 50 and over.) You enjoy upfront tax break. The earnings on your investments will compound free of taxes until you withdraw the money in retirement.

An alternative is to establish a Roth-IRA. The contributions into a Roth are with after-tax dollars. The maximum contribution is also $5,000 ($6,000 if 50 and over.). You give up the upfront tax benefit, but when you take out the money in retirement to pay for a dream trip or the groceries it’s free of Uncle Sam’s grasp.

If you’re a freelancer or self-employed the SEP-IRA is a terrific plan. You can make SEP IRA contributions of 20% of adjusted earned income annually.

NEXT TIP: More tax-deferred savings

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