There are two ways an Individual Retirement Account, or IRA, can save you money on your 2006 taxes. In an IRA, a worker is allowed to put aside up to $4,000 a year from employment income: $5,000 for those 50 years and older before 2006. You invest the money, and you don't have to pay any taxes on the investment growth until you're retired, when your tax rates will probably be lower than they are now. That's one way. Some people can also take an income tax deduction equal to the amount they put into their IRA, giving them an immediate tax break. This tax break used to be available to all, but is now limited if a worker is covered by a pension or profit sharing plan. The deduction is normally phased out over time. However, for 2006, if you're covered by a retirement plan at work, your deduction for contributions to a traditional IRA will not be reduced or phased out under new income guidelines. A phase-out or reduction will only occur if your modified adjusted gross income is between $75,000 and $85,000 for a married couple, qualified widow, or widower filing a joint return; between $50,000 and $60,000 for a single individual or head of household; or less than $10,000 for a married individual filing a separate return. In addition, Education IRAs have been renamed Coverdell education savings accounts. This information can be found in Publication 970, Tax Benefits for Higher Education. These notes are meant to be a general guide to federal income taxes. If you need specific advice, please consult a tax advisor or call the toll-free number for Federal Tax Information and Assistance at 1-800-829-1040.
