NEW YORK -- As the deadline nears for filing income tax returns, millions of taxpayers must decide whether to open an Individual Retirement Account for 1999, and if so, which kind.
The decision must be made soon because the deadline for opening a traditional IRA and getting a deduction of up to $2,000 is April 17, the date that tax returns are due this year. But financial advisers warn taxpayers to stop and think before rushing out to get a traditional IRA.
First, you might not be eligible for that deduction. More important is the fact that the money you save now on taxes might cost you more in the long term.
''Who cares about that!'' certified public accountant Ed Slott said of the tax savings on a $2,000 deduction.
Traditional IRAs have fallen from grace in the eyes of Slott and other financial advisers since the advent of the Roth IRA in the 1998. While the traditional IRA gives you money back up front -- if your tax rate is 28 percent, you'd get $560 on a $2,000 contribution -- you'll be paying taxes on every dollar you withdraw.
With the Roth IRA, you can't deduct your contribution, but the money you withdraw after age 59 1/2 will be tax-free. Chances are, with compounding of interest or advances in the stock market, your gain on investments will be much, much more than $560.
But if you feel you really need the tax deduction right now, and you want a traditional IRA, be sure you're eligible to get a deduction. Several factors go into determining whether you are, including whether or not you and/or your spouse were covered by a retirement plan at work and how much money you and/or your spouse earned last year.
The rules can get complicated. The instruction booklet with Internal Revenue Service Form 1040, the individual tax return, includes a worksheet to help taxpayers determine how much of their traditional IRA contribution is deductible. Further details are in the IRS's Publication 590, Individual Retirement Arrangements. It's available online for those with Adobe Acrobat on their computer at http://ftp.fedworld.gov/pub/irs-pdf/p590.pdf or by phone at (800) TAX-FORM.
In one of the simplest cases, if you were single last year and earned less than $31,000, you can take a full $2,000 deduction even if you were covered by a retirement plan at work. If you earned more than $31,000 but less than $41,000, you could get a partial deduction. At $41,000, there's no deduction.
If you are married and filing a joint return, and both spouses were covered by retirement plans, you get the full deduction as long as you jointly earned less than $51,000. If you jointly earned more than $51,000 but less than $61,000, you get a partial deduction; at $61,000 there's no deduction.
Another factor is age: You must be younger than age 70 1/2 to open a traditional IRA (there are no age restrictions for opening a Roth IRA).
If you're going to open an IRA and want it credited for the 1999 tax year, you have to have the money in the account by April 17 even if you file for an extension of the filing deadline.
Among the positives for many taxpayers and investors about the Roth IRA is that it has much higher income limits. You can contribute the full $2,000 if you earned $110,000 as a single taxpayer or $160,000 as a couple filing jointly. Above those amounts, the allowable contribution is reduced according to a formula contained in Publication 590.
You don't need to report the amount contributed to a Roth IRA, unless it was part of a conversion from a traditional IRA. In that case, you'll have to pay tax on the amount converted and file Form 8606 with your return. You need to keep records of all IRA transactions, taxable or not.
You can open a Roth IRA even if you were covered by a retirement plan at work. For some taxpayers, that begs the question -- should you pay the maximum to a 401(k) plan and then open a Roth IRA, or contribute as much as possible to the Roth IRA and then contribute to the 401(k)?
Some advisers say put some money into a Roth IRA simply because there's no tax to pay down the road. While your 401(k) contributions are entirely tax-exempt, you'll have to pay tax on withdrawals in the future.
Slott, who edits the Rockville Center, N.Y.-based newsletter Ed Slott's IRA Advisor, disagrees, noting that most employers match part of a worker's contribution.
''That's free money -- you never want to give that up,'' he said, advising taxpayers to contribute the maximum to a 401(k) and ''then go to the Roth IRA if you have money left over.''
A last decision that needs to be made is what kind of investment vehicle: a bank account, brokerage firm or mutual fund family.
If you're a young person, you probably don't want to put your money into a bank IRA, Slott said. ''It's safe, but it won't buy a cup of coffee in a few years,'' he said, advising younger people to buy into mutual funds. If they believe stocks are risky, then they should choose a conservative fund.
Older IRA contributors, if they're worried about risks, might sleep more soundly with a high-paying bank certificate of deposit.
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