Don't Mess With Taxes

Today, our Year-end Money Moves feature focuses on things you should do now to enhance your retirement earnings.

This is Part 3 of our week-long series. Part 1 covered tax tasks; Part 2 looked at investments. As noted in the investment category, many of these retirement strategies have a tax component.

And now, since none of us is getting any younger, let's get to our retirement year-end moves.

Contribute to your company plan
I don't know about you, but I can't wait until I don't have to work. The more I boost my retirement savings, the sooner that day will arrive. If you're of the same sentiment, then give yourself a holiday present by contributing to your retirement funds.

Most folks with a workplace account (a 401(k), 403(b) plan or a 457 plan) can stash up to $15,500 in it in 2007. If you're nowhere near that limit, head to your benefits office today and bump up your annual contribution amount.

Be careful, though, if you're a key employee -- an owner, top officer or a higher-paid employee. You could find your contributions limited if your plan is deemed "top heavy;" that is, key employees account for more than 60 percent of the plan's total accrued benefits.

Contribute to your IRA
Sure, you can postpone putting money into your IRA until the April tax-filing deadline. But the sooner you contribute, the sooner your added money starts earning.

For the 2007 tax year, you can contribute up to $4,000 to an IRA, traditional or Roth. If you're 50 or older, you can put an extra $1,000 into the account.
The advantages of a Roth are well known:

• Once you turn 59½ and have had the account for five years, you won't owe taxes on distributions.
• You can continue making contributions to a Roth for as long as you want, regardless of your age.
• As for spending the money, you decide, not Uncle Sam. Unlike a traditional IRA, you don't have to take required minimum distributions (RMDs) when you turn 70½.   

Some people, though, still contribute to a traditional IRA, usually so they can claim a tax deduction or because they make too much money to contribute to a Roth. Review your personal situation and determine which IRA is best (or available) for you and contribute now.

Take your required distributions
If you do have to take money out of your traditional IRA or 401(k) because you're older than age 70½, be sure you take at least the minimum required distribution by Dec. 31. If you miss the deadline, the IRS will whack you with a penalty.

Details on RMDs and the consequences of not taking out money per the IRS schedule can be found in this story.

Consider converting to a Roth
If your adjusted gross income is less than $100,000 and you have a traditional IRA, look into converting it to a Roth IRA. You don't have to switch over your whole account; you can move just a portion of the money. It might make sense if your income is lower this tax year so that the taxes you'll owe on the move won't be so much.

Even if you don't qualify for a Roth conversion now, make a note to do so in 2010. That year, thanks to the Tax Increase Prevention and Reconciliation Act of 2005, any traditional IRA owner will be able to convert the account regardless of income.

So you can make nondeductible contributions now (and for the next few years) and then convert the funds in 2010 and beyond.

Open a self-employment plan
If you work for yourself, either full-time or as a side job to supplement your working-for-the-man wages, you can contribute to a retirement savings plan covering these earnings.

While some options allow you to delay opening a self-employed retirement account until next year's filing deadline plus any extension, others (e.g., a solo 401(k) or Keogh) must be set up by Dec. 31. And these self-employment retirement savings options generally allow you to save much more, so don't miss out if this situation applies to you.