Take action to lower tax burden

For more information, call the University of Illinois McHenry County Extension at (815) 338-3737 or stop in at 1102 McConnell Road, Woodstock.

You've done your taxes -- or you've filed an extension -- and now you wish you'd done something, anything, so that you owed less. While that feeling is still strong, use it to motivate yourself to take positive action. Do yourself a favor where taxes are concerned, and at the same time, look after your future financial security. You can accomplish both by contributing to a retirement savings plan.

"Retirement plans come in two flavors: traditional tax-free or Roth versions," explains Karen Chan, a CFP and educator with University of Illinois Extension.

"Traditional plans let you defer taxes on your contributions and on the earnings until you withdraw the money in retirement. Depending on your tax bracket, that could save you more than 30 cents in taxes for every dollar you contribute."

Choose a Roth version, and you also get a major tax break. But the tax break comes later. "You pay regular taxes on your contributions now, but you will owe zero taxes on the earnings if you follow the rules about withdrawing the money. Generally you must have the account for five years and either reach age 59½ or become disabled before withdrawing money," according to Chan.

If you or your spouse works, or you receive taxable alimony, you can contribute to an IRA. You don't have to wait until the end of the year -- you can go ahead and start funding your 2008 IRA right now. Contributions are limited to $5,000 for 2008, or the amount you earned if that's less. If you're 50 or older, you can chip in an extra $1,000. If you're over 70½ and still work or run a business, you may have been told that you can't contribute to an IRA. That's only true for traditional IRAs. If you have earned income, you can contribute to a Roth IRA regardless of your age.

There are income limits for contributing to a Roth IRA and for deducting contributions if you or your spouse has a retirement plan at work. Contributions to Roth IRAs are phased out between $101,000 to $116,000 for single filers and $159,000 to $169,000 for joint filers (2008 figures).

Deductible contributions to traditional IRAs are phased out between $53,000 and $63,000 for single filers and $85,000 to $105,000 for married filing jointly (2008). If only your spouse is covered by an employer plan, the income limits are $159,000 to $169,000 for deductible contributions.

It's easy to set up an IRA with a mutual fund, broker, bank or other financial institution.

"Just do it now, while you're still feeling the pain of paying your taxes," Chan said.

Chan and a team of educators with University of Illinois Extension created a Web site to help you learn more about the tax benefits of retirement savings plans and about choosing investments in these plans. Visit the free, noncommercial Web site, Plan Well, Retire Well at www.RetireWell.uiuc.edu.