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Why you should make IRA, 529 contributions now

Maxing out these traditional tax shelters at the beginning of the year will pay off big time thanks to tax-free compounding.

By MSN Money producer Jan 6, 2014 3:52PM

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By Robert D. Flach, MainStreet

This is the first full business week of the new year, and the first thing you should do once you finish the word week is make your 2014 contributions to your traditional or Roth IRA, Coverdell account, 529 college savings plan and/or health savings account.

Thanks to the miracle of tax-free compounding, by making your contribution as soon as possible in the beginning of each year you will have substantially more in the account by the time you are ready to retire, or when you need the money to pay for education or medical bills, than if you wait till the last minute.

If you make a contribution to a Roth IRA for 2014 today and later find out that you are not eligible for a Roth, or, for whatever reason, decide you would rather have the funds in a traditional IRA, you have until the due date of your 2014 Form 1040, including extensions -- as late as Oct. 15, 2015 -- to "recharacterize" the contribution.

When making a contribution to any tax-deferred account, you must be sure to identify the year for which it is being made. Write "2014 contribution" clearly in the memo section of the check. If you enclose a payment voucher or coupon provided by the trustee make sure the correct year is marked. Follow up by checking the next statement for the account to verify the contribution was applied to the right year. This will avoid potential problems with the IRS down the road.

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