Three ways to save more for retirement and lower your taxes over the long run.
(Money Magazine)
Unlike most tax breaks, which expire at the end of the tax year, you have until midnight on April 15 to make a 2013 IRA contribution -- of up to $5,500, or $6,500 if you're 50-plus.
The case for conversion
Don't qualify for a write-off on a traditional IRA? Open one anyway, then convert it to a Roth. Here's what your retirement savings would be worth if you contributed $5,500 yearly starting at 30.
| Roth IRA | $436,000 |
| Tax-efficient brokerage account | $381,000 |
| Brokerage account | $361,000 |
| Nondeductible traditional IRA | $353,000 |
NOTES: Amounts are in today's dollars. Assumes 6% average return. Tax rate is 28% until retirement, 15% at retirement (0% cap gains rate). Inflation rate is 2% annually. SOURCE: Vanguard
Already putting money in? Pat yourself on the back: Only 15% of households saved in an IRA last year, according to the Investment Company Institute. But you may be missing opportunities to sock away even more. And if you're not participating because you think your income doesn't allow it? There's a workaround for that too, which you ought to consider.
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After all, the more you can put away in IRAs, the better. "They're one of the best tax breaks you can take advantage of for retirement," says New York CPA Ed Slott, founder of IRAHelp.com.
As you may know, contributions to a traditional IRA are fully deductible up to certain income limits -- for 2013, $59,000 in modified adjusted gross income for single folks and $95,000 for couples filing jointly. With a Roth -- eligibility for which starts phasing out at $178,000 for couples in 2013 -- you get no write-off upfront, but get to withdraw funds tax-free in retirement.
Related: 8 ways to cut your tax bill
In both types, your money grows without the drag of taxes. (President Obama recently announced another IRA for beginning savers, the MyRA.) Maximize these benefits with the tactics that follow, but you may want to hurry. Time's running out to reduce your 2013 bill.
Save for a spouse
While the IRS says you must have earned income to stash cash in an IRA, there's one exception: You can put money in on a spouse's behalf if he or she has no income, so long as you file jointly. "The IRS doesn't want to penalize a spouse for not working," says Adam Glassberg, a financial planner in the Chicago area.
A spousal IRA can be either traditional or Roth, with the same contribution allowances. One big, important difference is that contributions made to a traditional spousal IRA are fully deductible up to a higher income -- $178,000 in modified adjusted gross -- than for joint filers who both have access to a 401(k). Assuming you qualify for that deduction, a $5,500 contribution will shave $1,540 off your 2013 taxes if you're in the 28% tax bracket.
Stash self-employment income
Do you work for yourself? Or did you do a freelance gig or two on the side last year? The savings opportunity is especially good for you.
You can contribute as much as 25% of net self-employment earnings, up to $51,000 for 2013, to a simplified employee pension plan, or SEP IRA. That's in addition to the $5,500 you can put in a traditional or Roth IRA, plus the $17,500 you can put in a 401(k) if you have one through a primary occupation. So it's an especially worthwhile strategy for moonlighters who are already maxing out a workplace retirement plan. Plus, SEP contributions are fully deductible.
"It's a really valuable way to save and reduce your taxes," says Newport Beach, Calif., financial planner Dan Thomas.
Use the back door to a Roth
Even if you make too much to write off a traditional IRA contribution, you're still eligible to stash money in such an account. Without the deduction, a traditional IRA can lag behind a brokerage account invested in index funds or other tax-efficient holdings. But you may still have good reason to open one: A nondeductible IRA allows you to sidestep your way into a Roth if you wouldn't otherwise be eligible based on income.
Related: 13 crazy tax deductions
You can convert a traditional IRA to a Roth at any time, no matter your AGI. Assuming you have no other IRAs and shift over the funds immediately -- before you have gains -- you won't owe any taxes. (If you do have any existing deductible IRA savings, you will owe prorated tax based on the total balance, to essentially pay back the write-off you took upfront.)
Moving to a Roth can be especially beneficial if you think your tax bracket will be the same or higher in retirement. Unfortunately, this strategy won't help you fend off Uncle Sam this month, but you might be quite thankful 20 years down the road.
First Published: March 26, 2014: 8:00 PM ET
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