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Minimize the Tax Blow

Rachel Haig

Rachel Haig: Tax season is quickly approaching. Morningstar's director of personal finance, Christine Benz, is here with me to give you some tips on moves you can make to save money later. Thanks for joining me, Christine.

Christine Benz: Hi Rachel. Nice to be here.

Haig: So, typically, one of the first things you hear when you're talking about minimizing taxes is making sure you max out your 401(k) contribution. So, what should investors be thinking about right now with that?

Benz: Well, you should check your latest pay statement. It should say how much you've contributed to your plan for the year to date. And it is a great strategy, if you have the income to do so, to contribute the max. So, for 2009, its $16, 500 if you're under age 50, $22,000 if you're over age 50. So check and see how you're doing on that contribution. And again, if you're in the position to do this, you may be able to steer a higher percentage of your paycheck into that 401(k) to get that balance up for the year.

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Haig: And if you look at your 401(k) and you decide that you've pretty much done everything you can with that, what are some other steps that you could take?

Benz: Well, one idea, and certainly you wouldn't even have to have maxed out the 401(k), but I would definitely urge investors to take a look at making an IRA contribution. I think investors, even those who haven't had an IRA to date because their only option was to contribute to a non-deductible, traditional IRA--they earn too much to contribute to a Roth--have a unique opportunity in that they can open a traditional IRA this year, in 2009, and then convert it to a Roth IRA in early 2010, because that's when the income limits will be lifted on conversion.

So I think it's a great strategy for people who want to kind of get in a Roth IRA through the back door. And I do worry that Congress and the IRS may close this loophole down the line. But for now, it's an option, and it's something available to those who don't have Roth assets but are interested in starting a Roth IRA.

Haig: So it can make sense to bolster your 401(k) investments with a Roth IRA.

Benz: Absolutely. And if your 401(k) is lousy, or maybe you're not getting a match anymore, I would start with the Roth IRA before funding the 401(k).

Haig: Do you have any other moves that people can make right now to minimize their taxes?

Benz: Well, certainly, charitable contributions are deductible, if you itemize your deductions, so that can be another thing to look at doing before year-end. There are certainly a lot of charities that have found themselves in real need this year, and you can save yourself a little money on the tax front as well. So you need to do your due diligence, though, and make sure that your charitable contribution will be deductible, if that's one of the primary motivations for you in making that contribution.

Haig: OK. Well, it sounds like those tips will definitely help minimize the tax blow. Thanks for sharing them.

Benz: Thanks, Rachel.

Haig: For Morningstar.com, I'm Rachel Haig.