Give
Your IRA a Raise
Refund
checks from the Internal Revenue Service were expected to average about $2,300
in 2004. That's roughly a $100 increase compared with 2003.¹
Although it's
nice to get a $2,300 refund check once a year, you may be losing out on an
opportunity to help boost your retirement income. Assuming your refund is near
the average, the equivalent of $200 a month, it's money that could be working
for you.
If you are
accustomed to getting an income tax refund each year, consider putting the money
in an individual retirement account (IRA).2,3
Nix the
Interest-Free Loan to
Uncle Sam
The
simplest way would be to deposit the refund check into your IRA. However, if you
received a fairly significant refund this year, say $2,000 or more, you may want
to reduce your income tax withholding amount. Rather than providing the
government with an interest-free loan each year, contribute the corresponding
increase in take-home pay to an IRA. Some people may find it easier to make a
series of smaller contributions rather than trying to part with a large amount.
What happens if
you don't get much of a refund? With some exceptions, contributions to a
traditional IRA are tax deductible. A review of your most recent tax return can
show the effect that a $3,000 annual contribution would have on someone in your
tax bracket. You might be surprised at the outcome.
Already
Maxed Out?
If you are already contributing the maximum annual limit to an
IRA, there's good news. Beginning in 2005, IRA contribution limits will increase
to $4,000 ($4,500 for workers aged 50 and older).
When you get a
large refund, consider splitting the money so you can spend some now and save
some for the years to come. Call today so we can help you plan for a bright
future without squeezing your current budget.
1)
Associated Press, February 28, 2004
2) Before you take any specific action, be sure to consult with your tax
professional.
3) Distributions from traditional IRAs are taxed as ordinary income and, if
taken prior to reaching age 59½, may be subject to an additional 10 percent
federal income tax penalty.
