There is certainly no shortage of things for investors to worry about these days.

Topping the list are the ongoing budget deficit wrangling in Washington and spreading political unrest in the Middle East. These are just two of many issues about investing that you and I have no control over.

That’s why it’s more important for us to focus on what we can control. For instance, make sure that you are taking full advantage of the few tax-advantaged investment options that are still available.

And with March already here, it’s worth reminding yourself that the deadline for filing your taxes is quickly sneaking up on us — just about 45 days away — that’s the bad news.

The good news: Due to a calendar quirk this year, you have until Monday, April 18 … three more days than usual … to get your tax returns done on time.

And if you’re concerned about the potential for higher income tax rates in the years ahead ... and have extra assets on hand that you would like to shelter from the tax man ... then now is the time to consider making the best use of tax-deferred savings options.

You should check with your accountant — if needed — to make sure you are maximizing investments to your 401(k) at work ... or funding an IRA if you’re eligible. And if you have already maxed out these options, you may want to take another look at tax-deferred variable annuities as a means of further protecting your wealth from income and capital gains taxes.

IRA Complexities

Never underestimate the government’s ability to turn simplicity into complexity.

The Individual Retirement Account was originally intended to be a relatively straightforward way to save for retirement ... but constant changes over the years have made IRA options more complex than ever.

First, there are three distinct IRA savings options to consider:

1. Traditional IRAs, which offer a tax deduction for your contributions.

2. Nondeductible IRAs, where your money can grow tax deferred, but without an upfront tax break.

3. And Roth IRAs, which offer a few new advantages.

Understanding the rules about eligibility and which type of IRA is best for you to maximize your contributions can be a daunting task. The first thing to be aware of is that strict income and contribution limits apply when making tax deductible contributions to a traditional IRA.

In 2010 the tax deductibility feature, for example, is phased out at income levels between $89,000 and $109,000 modified adjusted gross income for married couples filing jointly. Limits are even lower for single filers. And on top of those limits, you’re limited to a $5,000 annual contribution, $6,000 if you are over age 50.¹

A Roth IRA can offer some big advantages over a traditional IRA if you qualify. For starters, the income limits to qualify for a Roth in 2010 are higher — at $167,000 for married couples filing jointly (contributions are phased out between $167,000 and $177,000).²

A Temporary Loophole in the Tax Code

Another advantage to the Roth over a traditional IRA is that it doesn’t require you to take minimum distributions at a particular age. This means you can allow your money to keep growing without the drag of annual taxes on income and capital appreciation until you’re ready to take a distribution.

Of course, another key difference of the Roth IRA is that when you do take a qualified distribution³, it will be 100 percent tax-free. That’s because with a Roth IRA, you’ve contributed money that's already been taxed ("after-tax" dollars), so any earnings grow tax-free as long as they stay in the account.

Even for higher-income investors, it may still be possible to take a backdoor into a Roth IRA by taking advantage of a special loophole in the tax code.

The reason for this strategy is that there are currently no income limits in place on Roth conversions. So, it could make sense for you to make a nondeductible IRA contribution first and then convert this amount to a Roth IRA right away. This temporary loophole is perfectly within the rules as currently written, but is bound to be closed at some point.⁴

Also, there are additional considerations to this strategy, including other IRA assets that you’ll need to take into account. Of course, before doing anything, you should consult with a qualified tax professional, but for a limited time at least, this could be a unique opportunity to consider.

Virtually Unlimited Tax Deferred Growth Potential

But what if you have already taken full advantage of every tax break Uncle Sam has to offer? What if you have already maxed out your IRA contribution options?

In that case, you may want to consider the additional tax deferred growth potential of a low-cost, tax deferred variable annuity.

There are many new, low-cost variable annuities available that are free from hidden fees and sales charges … and they can give you a wide range of investment options to choose from. Like a Roth IRA, you fund an annuity with after-tax dollars. Then, your money is free to compound on a tax-deferred basis for an extended period.

Unlike a Roth or traditional IRA, however, the big advantage with an annuity is that the amount of money you can contribute is virtually unlimited!

Bottom line: Every investor has unique circumstances that can influence your investment options, but with tax time rolling around soon, these are just a few tax saving tips you may want to consider before April 18th!

At Banyan Partners, we’re committed to providing each client with a comprehensive financial relationship ... which includes a review of your individual tax situation as part of your overall retirement plan. To learn more about tax-advantaged investment options, simply contact a Banyan financial advisor by calling 800.814.3045.

Good investing,

Mike Burnick
Director of Client Communications
Banyan Partners, LLC

Variable annuities are not guaranteed investment vehicles and are not insured by any federal entity. Investors should carefully review the prospectus before investing and consider the contract and the underlying portfolios’ investment objectives, risk, charges and expenses. It is possible to lose of principal amount invested. Withdrawals are subject to ordinary income tax and may incur a withdrawal charge. Withdrawals made prior to age 59 ½ may be subject to a 10% IRS tax penalty.

¹ Fidelity Investments: IRA Comparison – Roth IRA vs. Traditional IRA, 3/1/11
² Ibid.
³ IRS Publication 590, Individual Retirement Arrangements
⁴ Morningstar: Backdoor Roth IRAs Could Cost Some Investors at Tax Time, 1/3/11