Question: I filed an extension on my taxes this year. Can I still make my IRA contribution?

Jennifer Sanchez

Answer:

Dear Jennifer,

Unfortunately, the deadline for making Individual Retirement Account (IRA) contributions for the 2006 tax year was April 17th. (It's usually April 15th but this year the 15th fell on a weekend.) Even though you filed for an extension, extensions are not taken into consideration when funding an IRA.

However, all is not lost! I strongly urge you to start contributing to your IRA for tax year 2007. You can contribute any amount up to 100% of your earned income (officially called "compensation") or $4,000, whichever is less. Tip: If you are 50 or older, that amount is $5,000.

Compensation consists of wages, salary, freelance income and alimony received. Keep in mind that interest income, dividends and most rental income is regarded by the IRS as "passive" income and therefore does not qualify as compensation.

Even if you have an official retirement plan at work, you can (and should) contribute to an IRA as long as you are under age 70?.

And obviously the sooner you fund your IRA, the sooner the money begins working for you. If you don't have $4,000 or $5,000 readily available, you can contribute less, over a period of time -- perhaps putting in $200 or $500 every month or so.

Some possible sources of money could be: a tax refund, extra money in a bank account or money market fund, a bank CD that comes due, EE Savings Bonds that have matured, cash gifts, a bonus or a raise.

$Tip: If you pay off a loan, such as a car loan or mortgage, keep writing those monthly checks, but now put them into your IRA.

To determine if you should have a traditional or a Roth IRA and to figure out how much money you'll have when it's time for you to start withdrawing money from your IRA, use the calculators at: www.dinkytown.net. The answers are not 100% foolproof, but they will give you a fairly good idea of where you stand.

Click here to learn more about IRAs at BUYandHOLD.

Good luck!