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Pay yourself first

Ledger_calculator_2 Personal finance gurus are always telling us that when we set up our budgets, include a line item for ourselves.

No, I'm not talking about adding $500 a month to blow at the nearest mall.

The bookkeeping entry is what budgeters (Why did a vision of a Mickey Mouse Club kid with a ledger sheet just pop into my head? Or maybe an accountant with a mouse-ear hat?) like to call "paying yourself first."

It's a good approach. If each month alongside your electric bill, rent and car payment notations, you see an entry that says "Me," you'll be more likely to put away that cash at the same time you pay everyone else.

The key is to make sure that the "Me" payment is one that really pays off. Put your monthly payment to yourself into some sort of savings account.

You need to employ that same technique at tax time, too.

As you get ready to write a check to the U.S. Treasury (and that's who you need to make it out to, not the IRS), consider also writing another one to your individual retirement account.

Yes, if your tax bill is large (or even if it isn't), it's hard to take more disposable income from your checking account. But if some of that money goes to a retirement plan, it definitely will pay off in the future. And it might even help make your check to Uncle Sam a bit smaller.

You have until the filing deadline, Monday, April 17, to contribute to an IRA and have it count toward the 2005 tax year. If you have (or open) a traditional IRA, you might be able to deduct the contribution amount, and possibly lower your tax bill. The advantages of a traditional IRA are discussed in this story.

If you can't take immediate tax advantage of a traditional retirement account, then consider a Roth IRA. You can't deduct these contributions, but you won't owe any taxes on the money and its earnings when you eventually start making retirement withdrawals. More on Roths here.

Today's Tax Tip: Make an IRA contribution, either so you can get a deduction or just to maximize your contribution earning power, by Monday and it will count toward 2005. Then you can put in additional money later in the year for 2006.

If you're younger than 50, for either year and either type of IRA, you can contribute up to $4,000 (or the maximum amount you earn if it's less than that). Folks 50-plus can put in an added $500 (a "catch-up" contribution) by Monday for the 2005 tax year and an extra $1,000 toward their 2006 contribution amount.

William Perez, who helms the comprehensive tax section at About, also looks at these two IRAs, as well as self-employed retirement plans, which have slightly different deadlines. You don't have to be self-employed fulltime to take advantage of these savings options, so if you simply have a part-time, sideline job, check out what Perez has to say about them, and all types of IRAs, here.

And don't ignore your IRA if you’re getting (or already received) a tax refund. An IRA contribution could make the check that the IRS sends you a bit bigger. Or, when you do receive your refund check, consider putting at least some of it into your retirement account.

Remember: Money that you pay yourself means less for the IRS.


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