Ask the Expert: Not Too Late for a 2007 IRA

Question: I'd like to reduce my tax liability for 2007. Can I still make a contribution to my 401(k) or to an IRA and have it count toward the 2007 tax year? Or is too late for me to do that now? --J. Scott

Answer: As far as your 401(k) is concerned, the answer is no. You can't make a contribution in 2008 and have it count as if you had made it last year. That said, now is an excellent time to reconsider the percentage of salary you're saving this year with an eye toward boosting it so that you don't find yourself scrambling again next year.

Fortunately for you, as well as other procrastinators out there, the story is different when it comes to an IRA. You can still stash up to $4,000 ($5,000 if you're 50 or older) in an IRA and have the contribution count toward the 2007 tax year, as long as you do so by the April 15th tax filing deadline. Just be sure that you make it clear to the brokerage firm, mutual fund company or bank you're dealing with that the contribution is for the 2007 tax year.

As long as you do that, you'll retain the option of also making a contribution for this tax year, which, by the way, can be even larger, since the ceiling for IRA contributions for the 2008 tax year is $5,000, plus an extra $1,000 catch-up contribution for anyone 50 or older.

The ABCs of IRAs

Given the way you've phrased your question, I assume that you're primarily interested in doing a traditional deductible IRA. And, hey, if the prospect of saving some bucks on your taxes is what it takes to get you to save more money for retirement, I'm jiggy with that.

But you might think about doing a Roth IRA instead. True, contributing to a Roth won't shave your tax tab this year. But there are several other advantages to a Roth, among them the fact that it effectively allows you to save more money as well as hedge your tax exposure in retirement.

Of course, all this talk about deciding between a traditional deductible IRA and a Roth, assumes that you're actually eligible to do either or both. In fact, that depends on a variety of factors, including your income and whether or not you're covered by a workplace plan (which you apparently are). If you're married, your spouse's income and access to retirement plans at work can also come into play.

One way to figure out if you're eligible for a traditional deductible or Roth IRA and, if so, how much you can contribute is to pore over IRS Publication 590: Individual Retirement Arrangements. Or you can cut to the chase and go to an online calculator like this one.

Deductible or nondeductible

By the way, if it turns out that you're not eligible for a deductible IRA or a Roth, you always have the option of doing a nondeductible IRA (assuming, that is, you have earned income). Until recently, I probably wouldn't even have brought up this option since I think most people can do as well or better by investing in tax-efficient mutual funds.

As the result of a tax law change in 2006, however, nondeductible IRAs can be a conduit for getting money into a Roth IRA (although you've got to wait until 2010 to actually make the transfer). In any case, if you're definitely boxed out of a traditional deductible IRA and a Roth IRA, you may want to consider contributing to a nondeductible IRA and later converting to a Roth. (For details on that maneuver, click here.)

Bottom line: One way or another you should be able to contribute to an IRA. So don't put it off any longer. Get thee to a mutual fund company, a brokerage firm or even a bank before April 15th and fund that IRA. Come retirement time, you'll be glad you put the extra bucks away.

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