Max out your IRA in 2005. Here is how

By: Robert Johnson

Many people are aware that the social security system as we know it is not going to hold out very long. As the economy worsens and the baby boomers begin to retire an already strained system is likely to fold under the pressure. To offset this possibility many people have begun contributing to individual retirement accounts or IRA’s. The added bonus is that under the correct circumstances, all or part of this contribution is not taxable and you have until the filing deadline of the next year in which to claim the deduction.

The good news is in 2005 the amount you could contribute went up to $4,000 and $4,500 if you are age fifty or older. This means that if you missed your opportunity to maximize your contribution you have until April 15th of 2006 to rectify the situation. This is good news if you are filing a late 2005 tax return.

Basically, if you have an IRA and are covered by a retirement plan at work you can now have a larger income without being affected by the IRA phase out on a 2005 tax return.

There are two forms of individual retirement accounts, traditional and ROTH. With a traditional account, you can divert your income into the retirement account pre-tax. Of course, this only applies if you meet certain income and filing status. The downside to this type of IRA is that you will be taxed on the distribution when you hit the right age.

A ROTH IRA is practically just the opposite; you get no tax break on the front end. You might think it would be a bad place to put your 2005 retirement income however; you have to understand that the tax savings come on the distribution side of this IRA. When you reach the relevant retirement age, your distributions are not taxed.