This is just a reminder that tomorrow, Tuesday, April 17th, 2007, is your last chance to fund an IRA for the 2006 tax year. After tomorrow, you will have lost the chance forever to make your contribution for 2006.

You can contribute up to $4000 in 2006 towards an IRA if you are under 50. If you are 50 or over, you can actually contribute $5000 in 2006.

Many people don’t realize that even if you have a 401(k) or 403(b) plan at work, you can still qualify to contribute to an IRA.

Assuming that you are not opening an IRA for your partnership or business, there are four IRAs to be aware of:

• Deductible IRA. This is what most people think of when they think of an IRA. This is a retirement account where you get to deduct your contributions for the year off your income on your tax return. The problem? You can’t deposit into this type of IRA if you have a 401(k) or 403(b) plan at work, and people over a certain income are disqualified.
• Roth IRA. The hero of the hour. This is the IRA that everyone is talking about. You don’t get a tax deduction this year, but you get a better bonus down the road. All gains on this IRA are tax-free, forever, as long as you withdraw them after the age of 59 1/2. Problem? You can’t contribute to this IRA if you make more than $110,000 as an individual, $160,000 as a married couple filing jointly.
• Rollover IRA. You can’t contribute to this type, but this is a great place to move your 401(k) money from your old company. It keeps the tax status of the old 401(k), and it usually gives you access to a much wider variety of investment options. Better yet, you have the option of either converting this IRA to a Roth IRA, if your income permits, or you can roll it into a future company 401(k) if you’d like.
• Non-Deductible IRA. This is the over-looked gem of the IRAs. Anyone can contribute to these in any year, regardless of income. You will owe taxes on the gains when you withdraw them in retirement, but they get to compound tax free until then.

There are several good reasons to consider an IRA contribution this year, even if it’s non-deductible:

• You never get the chance to go back and make contributions for past years. You lose your option to make a 2006 contribution tomorrow, forever.
• You can now make IRA contributions for a spouse that does not work, up to $4000 for a year.  A great addition if you are in a one-income household, and you are concerned that your retirement savings are limited.
• In 2010, thanks to the 2006 budget, you will get the ability to convert a non-deductible IRA to a Roth IRA, regardless of income! Check out my post on the 2010 Roth IRA Conversion Loophole for more information.

Reasons not to make an IRA contribution for 2006:

• You can’t afford the drop in liquidity of having your money locked up for potentially decades.
• You forgot about the April 17th deadline, and read this post too late.  🙂

Opening up a new IRA is extremely low cost, if not free. E*Trade offers free IRAs. Vanguard offers IRAs for only $10. You can open them online, with a transfer direct from your checking account.

Happy Saving!