Why an IRA might make sense this year

You have until April 15 to fund an Individual Retirement Account for 2008 and reap a tax deduction of up to 35 percent, depending on your income. The contribution limit on traditional and Roth IRAs for tax years 2008 and 2009 is $5,000, plus $1,000 if you’re over 50.

Anyone younger than 70½ who earns income can set up an IRA. You can fully deduct all or a portion of your 2008 IRA contributions if your modified adjusted gross income is less than $105,000 for joint filers or $63,000 for singles and heads of household. (The limits rise to $109,000 and $65,000, respectively, for 2009.) There are several good reasons to make 2008 and 2009 IRA contributions by April 15:

To qualify for a Roth later

After-tax money invested in a Roth IRA is free forevermore from federal income tax. Full contributions to a Roth IRA are limited this year to single filers and heads of household with modified AGIs below $105,000, and joint filers with AGIs below $166,000. If you make more than that—up to $176,000 for joint filers or $120,000 for singles—you can make partial contributions. But in 2010, under current tax law, anyone regardless of income can do a rollover from a traditional IRA into a Roth IRA.

So the money you contribute this year can be rolled over into a Roth IRA next year. You’ll pay regular income tax on any deductible contributions and all gains when you do, but the long-term tax benefit could be significant.

If you are holding losing investments in an existing IRA and meet the income requirements for a Roth, consider a rollover now. Your income tax liability will be minimized because of the loss, and you’ll benefit sooner from converting to a completely tax-free investment.

For the opportunity

You only get limited chances to add to tax-deferred savings. Your money will grow much faster in a tax-deferred account, and you’ll pay less in taxes when you withdraw the funds in retirement. A 50-year-old in the 28 percent bracket who set aside $1,000 in a traditional IRA that earned 6 percent annually would walk away at age 65 with $511 more after taxes than if he had put the money in a savings account that was taxed each year.

For a child’s future

If your child or grandchild earned a few bucks last year, set up a Roth IRA for the child now. He or she can contribute up to $5,000 (the earnings must be reported on a Form W-2). Richard S. Kahler, a fee-only financial planner in Rapid City, S.D., estimates that $5,000 invested every year between ages 22 and 29, and compounding at an average 8 percent through age 66, would grow to $1 million with no additional investments. Starting that strategy at age 29 would require continuous $5,000 annual contributions until age 66 to get to that same $1 million.

This article appeared in the April 2009 issue of Consumer Reports Money Adviser.