Before-Tax IRA Earnings

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Before-Tax IRA Earnings

Contributing before-tax earnings to an IRA account can make a big difference in your retirement savings, since you can defer paying taxes on whatever your investment earns in an IRA. If your investment pays dividends or has capital gains distributions (such as some mutual funds), you avoid paying taxes on these gains. If you expect your tax rate to drop after your retirement, because you have less income, your savings could amount to an even bigger nest egg. For 2008, you may contribute up to $5,000 of your earnings or up to $6,000 if you are age 50 or more.The limit will be indexed (increased with the rate of inflation) in $500 increments starting in 2009. If you earn an income from wages or your own business and you're under the age of 70-1/2, you can open a traditional IRA. For lower income earners, the contribution itself may be deductible. Contribution can be made for the prior tax year up until April 15.

But you may find that other tax-deferred retirement investments are a better deal. Some other options are described below. The IRS publication (590) is available at this link.

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