If you haven't already done so, now is a good time to consider your options for 2008 IRA contributions. Contributions can be made until April 15, 2009, the 2008 tax return filing date.

An individual retirement account (IRA) is a personal savings plan that offers specific tax incentives to encourage you to save for retirement. Currently, there are two types of IRAs. Traditional IRAs allow for tax-deductible contributions under certain conditions. Roth IRAs are funded with after-tax dollars but may allow for tax-free withdrawals under certain conditions.

It is important to realize that an IRA is not itself an investment, but a tax-advantaged vehicle in which you can hold some of your investments. Contributions to IRAs must be in cash and then you decide how to invest your IRA dollars based on your investment plan.

For 2008, you can contribute up to the lesser of $5,000 ($6,000 if age 50 or older) or 100 percent of your taxable compensation to either a traditional or Roth IRA. You may also contribute the same amounts for a nonworking spouse if the working spouse has adequate compensation for the year and you file a joint tax return.

Traditional IRAs

Traditional IRA contributions may be deductible depending on your annual income, your income tax filing status, and whether you (or, in some cases, your spouse) are covered by an employer-sponsored retirement plan. A married couple, filing a joint tax return, can fully deduct their traditional IRA contributions if neither of them is covered by an employer-sponsored retirement plan such as a 401k. If either spouse is covered under a retirement plan, their modified adjusted gross income (MAGI) will determine how much will be tax deductible. You can always make a nondeductible contribution no matter how high your income is.

Jim and Sally, age 54, would like to make the maximum deductible IRA contributions for 2008. Their MAGI for 2008 should be $85,000. Jim participates in his company 401k plan and Sally does not. They will be able to contribute and deduct $6,000 each to their traditional IRAs. If their MAGI for 2008 is greater than $105,000, their IRA contributions will not be deductible.

Deductible contributions reduce your taxable income for the year but will be taxed, along with any earnings on those dollars, when you withdraw them from the IRA (tax-deferred growth). Nondeductible contributions are not taxed when you later withdraw them from the IRA however investment earnings will be taxed.

Roth IRAs

Roth IRA contributions are never tax deductible (you can contribute only after-tax dollars), but withdrawals including earnings, may be completely tax free if you meet certain requirements. Generally to qualify for tax-free distributions you must be age 59-and-a-half and wait for five years after your contribution for the first tax year was made to withdraw funds.

Not everyone can contribute to a Roth IRA, as this depends on your annual income and income tax filing status. A married couple filing jointly may make Roth IRA contributions if their MAGI is $159,000 or less. A partial contribution can be made up to $169,000, with no contributions allowed if MAGI is greater than $169,000.

Choosing the right type of IRA

To make a traditional IRA contribution you must be under age 70-and-a-half where age isn't a factor to make a Roth IRA contribution. Additionally, traditional IRAs require annual minimum distributions after you turn age 70-and-a-half while Roth IRAs do not. These annual withdrawals are based on a life expectancy calculation and are intended to dispose of your traditional IRA balance over a given period of time. You can always withdraw more than the required minimum in any year, but if you withdraw less, there will be a penalty.

A 10 percent tax penalty is generally assessed on the taxable portion of any distribution you take from a traditional or Roth IRA prior to age 59-and-a-half. This tax is over and above regular federal income tax. There are a number of exceptions to the tax, however consider making IRA contributions only with funds you won't need until after age 59-and-a-half.

How do you decide which type of IRA is right for you? As a general rule, there is no advantage to making nondeductible contributions to a traditional IRA if you qualify to make either deductible contributions to a traditional IRA or after-tax contributions to a Roth IRA. Assuming that you qualify for both, determine if you want a current tax benefit or a future tax benefit.

Reach Connie Brezik, a Casper investment advisor and financial planner, at {M7connie@asset-strategies-inc.com.