Your 2006 taxes: Easing the bite on retirement savings

February 16, 2007

Here's how to expand your deductible contributions for 2006 and spur your nest egg's growth.

Take advantage of loopholes. For openers, keep in mind that exceptions to the annual limits on plan contributions may allow you to add to the amount you put in for last year. In that case, you can generally make adjustments up until the deadline for filing your 2006 return.

Your age, for instance, may help you bypass the limits. A Pittsburgh internist's profit-sharing plan for his unincorporated practice includes a 401(k) provision. The ceiling on 401(k) salary deferrals was $15,000 in 2006, but because he turned 50 during the year, the "catch-up" rules upped the ante by $5,000. On top of that $20,000, he could theoretically contribute a 20 percent share of his income under the profit-sharing feature of his plan, or about $30,000, for a total of $50,000. (Note: "Income" here means net earnings minus half the self-employment tax.)

Suppose your pension adviser retains, say, 5 percent of each contribution as his fee for administering your plan. Ask him to bill you directly instead. Since the law doesn't treat such payments as contributions, they won't violate the limit. If you haven't yet made your final contribution for 2006, this ploy will, in effect, boost it 5 percent, and you can claim the adviser's fees as a practice expense for 2007.

Step back in time with a SEP. Even if you didn't adopt a retirement plan last year, you can still set one up that will permit you to deduct contributions on your 2006 return. It's called a SEP (Simplified Employee Pension) plan. Like a profit-sharing plan, it would let the owner of an unincorporated practice contribute up to 20 percent of his previous year's income-as much as $44,000-to an IRA established under the plan. He'd also have to contribute up to 25 percent of salary to an IRA for each current employee 21 or over who's worked for him during part of at least three of the past five years.

If that cost burden's too big or you have only a modest sum of cash to set aside, think about a traditional IRA instead. Provided you weren't an active participant in any retirement plan last year and are single, you have until April 16 to contribute $4,000 ($5,000 if age 50 or over) to a traditional IRA and deduct it on your 2006 return. If married and your spouse wasn't a plan participant, he can do the same. If your spouse was a participant, that won't affect your deductible contribution, assuming your joint adjusted gross income (AGI) didn't exceed $150,000. But your spouse will get no deduction for his IRA contribution.

Consider a Roth IRA. Unlike a traditional IRA, participation in a retirement plan doesn't affect Roth IRA contributions. For a single person with less than $95,000 AGI, the 2006 maximum is the same as for a traditional IRA, but it phases out between $95,000 and $110,000. For couples, the phase-out range is $150,000 to $160,000.