Should You Open Your IRA for 1999 or 2000?

By Clifton Linton
Writer, mPower

In this article Tying Up 1999's Loose Ends Still Need A 1999 Tax Deduction? Open An IRA Take Advantage Of Extra Interest - Open Your 2000 Now How To Get Ahead

Ashley Toscano needs to make a retirement decision by April 17.

Will he take some extra money he has and put it in his SEP IRA as a 1999 contribution, or get an early start on his 2000 contributions?

The difference between his choices could be a few extra thousand dollars when he finally retires.

If, like Toscano, you haven't maxed out your IRA for 1999, or even opened an account, you face a similar decision. The IRS gives you a window during which you may contribute to IRAs for both the current and past tax year. This is when you should ask yourself the question: "Should I put money away for 1999, while I still have the chance, or get an early start on 2000?"

"If you only have $2,000, do 1999." - Dennis Filangeri, a certified financial planner located in Metairie, La.

Tying Up 1999's Loose Ends

If you haven't made your full contribution to an IRA for 1999, now's the time to do it, financial planners say. The IRS gives you until April 17, 2000, tax day, to contribute to or open an IRA for the 1999 tax year.

You were able to start making contributions to an IRA for 2000 on January 1, 2000, as well. So, if you have $4,000 to invest right now, you can make your 1999 and 2000 contributions at the same time.

But "if you only have $2,000, do 1999," said Dennis Filangeri, a certified financial planner located in Metairie, La.

Here's the reasoning. Say you used your $2,000 to fund an IRA for 2000. If you then came into some money in June, you wouldn't be able to contribute again for the year. But, if you opened a 1999 IRA with your $2,000, then found yourself with extra money in June, you could still make a contribution to your IRA for 2000.

Indeed, Toscano should think about putting his extra money into his 1999 SEP IRA. He's an independent contractor, so he doesn't know exactly how much he'll earn for the year. If he has more work than expected, he may have more money later to contribute for 2000.

Still Need A 1999 Tax Deduction? Open An IRA

Important tip If you make an IRA contribution during this window of opportunity, make sure you tell your financial institution in writing what tax year the contribution is for.

If you still need a tax deduction for the 1999 tax year, you might be able to get it by opening a traditional IRA.

If you aren't an active participant in a retirement plan at work, such as a 401(k), you may deduct your entire traditional IRA contribution regardless of your income. If your employer offers a plan but you do not contribute to it, you may still be considered an active participant. You should check with your employer.

If you're an active participant in a retirement plan at work, you may still contribute up to $2,000 to a traditional IRA but the contributions may not be fully deductible. If, in 2000, you were a single filer and earned between $32,000-$42,000 or married and filing jointly and earned between $52,000-$62,000 your ability to deduct an IRA contribution is phased out. Above the upper limits, you may still make a $2,000 contribution, but it will not be tax-deductible.

If you meet the income qualifications, you could open a Roth IRA. Remember that the government allows you to save a total of $2,000 a year in all your IRA accounts combined.

Financial planners urge you to take full advantage of any employer-sponsored retirement plan, especially if it has a matching contribution, before contributing to an IRA.

Toscano says he'll likely put his money toward his 1999 IRA contribution now, for tax reasons. "I think I'll need a tax break," he said.

Helpful tip Even if you have a 401(k) plan at work and earn too much to qualify for the tax deduction, you should still think about opening an IRA. You will still be able to take advantage of tax-deferred growth on your money.

Take Advantage Of Extra Interest - Open Your 2000 Now

Once you've contributed the maximum for 1999, try to make your 2000 contribution as early in the year as possible. By contributing to your IRA at the beginning of the tax year, rather than 15 months later, you can take advantage of extra interest income, Filangeri says. He offers the following example to show what that 15 months can mean at retirement time.

By opening your IRA at the beginning of the tax year, rather than 15 months later, you can take advantage of extra interest income. - Dennis Filangeri, certified financial planner

Suppose you're 35 years old and expect to retire at age 65. Further suppose that on January 1, you had $2,000 to invest and you could get a 10% rate of return. After 15 months, on April 1, 2001, you would have $2,265. If you left that $2,265 in the bank, earning 10% interest for 30 years, you would end up with $39,552.

Now, let's suppose you decided to wait until the last minute, April 1, 2001 to invest that same $2,000. At the end of 30 years, at a 10% rate of return, that money would grow to $34,898. That's a difference of nearly $5,000.

If you put in $2,000 at the start of every year, instead of just once, as in the above example, the difference would be $180,000, said Filangeri.

Getting started early is especially important if you are opening a Roth IRA, says Kim Dignum, a certified financial planner with Dignum Financial Services.

"The sooner you have your money in there, investing, the more it can grow just with compounding," Dignum said. "The greater the compounding the greater the benefit of the Roth."

How To Get Ahead

"I think its easier to set aside $167 a month than to think about setting aside $2,000 a year." - Kim Dignum, certified financial planner with Dignum Financial Services

If you're a disciplined saver, you should be able to save $2,000 to fund your IRA at the beginning of the year. However, if you're like most of us, it's tough to come up with $2,000 after the holidays.

Dignum offers a compromise: dollar cost averaging. That's a fancy way of saying "put a little in the account each month." If you put $167 each month into your IRA, by year-end you'll have $2,000.

"I think its easier to set aside $167 a month than to think about setting aside $2,000 a year," Dignum said.

To make it even easier on yourself, you can arrange with your bank to automatically transfer money into your IRA every month. Then you can think about getting ahead for 2001. Through careful saving, you might be able to have a $2,000 lump sum ready to dump in an IRA in January 2001.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Should You Open Your IRA for 1999 or 2000?

By Clifton Linton
Writer, mPower

In this article Tying Up 1999's Loose Ends Still Need A 1999 Tax Deduction? Open An IRA Take Advantage Of Extra Interest - Open Your 2000 Now How To Get Ahead

Ashley Toscano needs to make a retirement decision by April 17.

Will he take some extra money he has and put it in his SEP IRA as a 1999 contribution, or get an early start on his 2000 contributions?

The difference between his choices could be a few extra thousand dollars when he finally retires.

If, like Toscano, you haven't maxed out your IRA for 1999, or even opened an account, you face a similar decision. The IRS gives you a window during which you may contribute to IRAs for both the current and past tax year. This is when you should ask yourself the question: "Should I put money away for 1999, while I still have the chance, or get an early start on 2000?"

"If you only have $2,000, do 1999." - Dennis Filangeri, a certified financial planner located in Metairie, La.

Tying Up 1999's Loose Ends

If you haven't made your full contribution to an IRA for 1999, now's the time to do it, financial planners say. The IRS gives you until April 17, 2000, tax day, to contribute to or open an IRA for the 1999 tax year.

You were able to start making contributions to an IRA for 2000 on January 1, 2000, as well. So, if you have $4,000 to invest right now, you can make your 1999 and 2000 contributions at the same time.

But "if you only have $2,000, do 1999," said Dennis Filangeri, a certified financial planner located in Metairie, La.

Here's the reasoning. Say you used your $2,000 to fund an IRA for 2000. If you then came into some money in June, you wouldn't be able to contribute again for the year. But, if you opened a 1999 IRA with your $2,000, then found yourself with extra money in June, you could still make a contribution to your IRA for 2000.

Indeed, Toscano should think about putting his extra money into his 1999 SEP IRA. He's an independent contractor, so he doesn't know exactly how much he'll earn for the year. If he has more work than expected, he may have more money later to contribute for 2000.

Still Need A 1999 Tax Deduction? Open An IRA

Important tip If you make an IRA contribution during this window of opportunity, make sure you tell your financial institution in writing what tax year the contribution is for.

If you still need a tax deduction for the 1999 tax year, you might be able to get it by opening a traditional IRA.

If you aren't an active participant in a retirement plan at work, such as a 401(k), you may deduct your entire traditional IRA contribution regardless of your income. If your employer offers a plan but you do not contribute to it, you may still be considered an active participant. You should check with your employer.

If you're an active participant in a retirement plan at work, you may still contribute up to $2,000 to a traditional IRA but the contributions may not be fully deductible. If, in 2000, you were a single filer and earned between $32,000-$42,000 or married and filing jointly and earned between $52,000-$62,000 your ability to deduct an IRA contribution is phased out. Above the upper limits, you may still make a $2,000 contribution, but it will not be tax-deductible.

If you meet the income qualifications, you could open a Roth IRA. Remember that the government allows you to save a total of $2,000 a year in all your IRA accounts combined.

Financial planners urge you to take full advantage of any employer-sponsored retirement plan, especially if it has a matching contribution, before contributing to an IRA.

Toscano says he'll likely put his money toward his 1999 IRA contribution now, for tax reasons. "I think I'll need a tax break," he said.

Helpful tip Even if you have a 401(k) plan at work and earn too much to qualify for the tax deduction, you should still think about opening an IRA. You will still be able to take advantage of tax-deferred growth on your money.

Take Advantage Of Extra Interest - Open Your 2000 Now

Once you've contributed the maximum for 1999, try to make your 2000 contribution as early in the year as possible. By contributing to your IRA at the beginning of the tax year, rather than 15 months later, you can take advantage of extra interest income, Filangeri says. He offers the following example to show what that 15 months can mean at retirement time.

By opening your IRA at the beginning of the tax year, rather than 15 months later, you can take advantage of extra interest income. - Dennis Filangeri, certified financial planner

Suppose you're 35 years old and expect to retire at age 65. Further suppose that on January 1, you had $2,000 to invest and you could get a 10% rate of return. After 15 months, on April 1, 2001, you would have $2,265. If you left that $2,265 in the bank, earning 10% interest for 30 years, you would end up with $39,552.

Now, let's suppose you decided to wait until the last minute, April 1, 2001 to invest that same $2,000. At the end of 30 years, at a 10% rate of return, that money would grow to $34,898. That's a difference of nearly $5,000.

If you put in $2,000 at the start of every year, instead of just once, as in the above example, the difference would be $180,000, said Filangeri.

Getting started early is especially important if you are opening a Roth IRA, says Kim Dignum, a certified financial planner with Dignum Financial Services.

"The sooner you have your money in there, investing, the more it can grow just with compounding," Dignum said. "The greater the compounding the greater the benefit of the Roth."

How To Get Ahead

"I think its easier to set aside $167 a month than to think about setting aside $2,000 a year." - Kim Dignum, certified financial planner with Dignum Financial Services

If you're a disciplined saver, you should be able to save $2,000 to fund your IRA at the beginning of the year. However, if you're like most of us, it's tough to come up with $2,000 after the holidays.

Dignum offers a compromise: dollar cost averaging. That's a fancy way of saying "put a little in the account each month." If you put $167 each month into your IRA, by year-end you'll have $2,000.

"I think its easier to set aside $167 a month than to think about setting aside $2,000 a year," Dignum said.

To make it even easier on yourself, you can arrange with your bank to automatically transfer money into your IRA every month. Then you can think about getting ahead for 2001. Through careful saving, you might be able to have a $2,000 lump sum ready to dump in an IRA in January 2001.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.