There's still time to trim tax bills
Knight Ridder Newspapers
If you're scrambling to finish your tax return, you might be kicking yourself for failing to take steps before the end of last year to cut your tax bill.
Well, it is too late to sell money-losing investments or put money into a 401(k) to reduce last year's tax bill, but many taxpayers can still get a nice tax benefit -- for 2001 or future years -- for putting money into an IRA.
That's because the deadline for making last year's contribution to an IRA wasn't Dec. 31, the deadline governing most tax matters. Instead, it's the tax-filing deadline, April 15.
There are two types of IRAs -- the traditional IRA and the Roth. Contributions to a traditional IRA can be tax-deductible for some people, nondeductible for others. With these IRAs, investment gains and deductible contributions are taxed as income when they are withdrawn. With Roths, there are no deductions on contributions, but withdrawals are tax-free.
For 2001, an individual can contribute up to $2,000 to IRAs, regardless of the type you choose, or even if you use more than one type. (That limit goes to $3,000 this year, $3,500 for people who will be 50 or older at the end of the year.) All contributions must come from earned income -- money you are paid for working, not from savings, gifts or investment earnings.
With a traditional IRA, investments grow on a tax-deferred basis -- there's no annual tax on interest, dividends or capital gains from profitable investments you sell.
Instead, you pay income tax on money you withdraw. As with Roths, you can start taking money out after turning 591⁄2.; Take money out earlier and you can be hit with taxes plus a 10 percent penalty. With a traditional IRA, you must begin withdrawing money after turning 701⁄2.;