Roth IRA: Tax season is the time to save

Don't think of the next few weeks as a grim time of tax-season drudgery; think of them as your special, limited-time offer to enrich your future.

Most tax-favored retirement and health savings programs give you until April 15, 2014 to make contributions that count against your 2013 tax year. That's such a significant benefit that it would be foolish to ignore it.

For example, $5,500 (the maximum annual contribution for an individual retirement account; folks over 50 can add an extra $1,000) invested for a 7.5-percent average annual return would grow to $24,535 in 20 years, according to a Bankrate.com calculator. A 30 year old who puts $5,500 away today at that rate and doesn't touch it until she is 70 would have $109,444 - just from that one contribution.

So, beg, borrow and scrape together one more 2013 contribution if you haven't done so already - saving now is a no-brainer.

The much more difficult "brainer" is this: Which account do you feed first?

Most workers can choose either between a traditional tax-deferred IRA (contributions are made with pre-tax money and, along with earnings, taxed as income when withdrawn) and a Roth IRA (contributions are made with after-tax money, but all withdrawals are income-tax free if made in retirement).

Also competing for their dollars are health care savings accounts (with an April 15 deadline as well).

Here's how to figure out where to send your precious dollars this year.

FEED YOUR HEALTHCARE SAVINGS ACCOUNT (HSA)

This advice may surprise some retirement-focused experts, but it's the best first choice of where to stash cash.

These privately held accounts are meant to offset the expenses consumers face when they have high deductible health care plans and they come with a benefit you can't find anywhere else: The contributions are tax free and the money, when it comes out, is tax free too.

Furthermore, there's no law that says you have to spend your HSA money annually. You can save it for retirement and use it to offset the post-retirement healthcare costs that everyone keeps warning you will be hefty.

You can even save your receipts now and then pull money out of that account after you retire to reimburse yourself for healthcare money you spent in earlier years.

ROTH, ROTH, ROTH

Financial pros say that in almost every case, you cannot top the advantages of a Roth IRA.

"Hands down, it's a no brainer," says Ed Slott, an expert on retirement savings.

Over time, the money earned within the Roth (and withdrawable tax free) dwarfs the amount of the initial contributions.

A 25-year old who faces the same income tax rate in retirement as during his working years would end up with 20 percent more money to spend in retirement if he opts for a Roth IRA instead of a traditional IRA, according to new research from T. Rowe Price. (The research assumed a 7-percent return pre-retirement and a 6-percent return in a 30-year retirement.)

That supports the view that "Roth is better if tax rates go up in retirement, and if tax rates stay the same in retirement, and even for most people for whom tax rates will go down in retirement," says Stuart Ritter, vice president of T. Rowe Price Investment Services and a financial planner.

Furthermore, accountholders are allowed to withdraw their contributions from a Roth at almost any time and for any reason without any tax consequence, says Slott.

"That removes all the risk."

A TRADITIONAL IRA

There are a few reasons why you might choose a traditional tax-deferred IRA instead of a Roth.

If you earn more than $127,000 as a single person or $188,000 as a couple filing jointly, you aren't allowed to contribute to a Roth IRA. And, if you're covered by a retirement plan at work and earn that much, you won't be able to deduct your contribution from your 2013 taxes, either.

But you will be able to accumulate money in your traditional IRA and eventually convert it to Roth status, paying taxes on the account's earnings when you do convert it. It's like a back door to a Roth, says Slott.

There's one other category of saver who might be better off with the traditional IRA, according to T. Rowe Price's Ritter.

That's the older worker who expects to retire soon and who expects her post-retirement tax rate to be significantly lower in retirement. The combination of fewer years of compounding and the fact that money coming out will be taxed at a lower rate than it would be going in negates the Roth advantage in those cases.

DOUBLE UP

There's another point of research on which most retirement savings experts agree: The earlier you save, the better.

That means that instead of waiting until March 2015 to make your 2014 contribution, you should do it now.

If you have the cash, you can make both your 2013 and 2014 contributions now; that would be $11,000 if you're under 50 and $13,000 if you're over 50.

If that's too big a check for you to write right now, set up an automatic contribution so that your 2014 contribution is done by the end of the year, instead of waiting a whole year to make a lump-sum payment.

Over ten years, that monthly contribution will put more retirement money in your pocket 98 percent of the time, says Ritter.