Reducing Tax Liability

[Show-me]

Don't know it that is the correct title, but it works.

Here is the deal.

I am doing my tax return on TaxCut and playing with the IRA numbers.

If I invest $6,700 into mine and my wifes 2007 Traditional IRA I will reduce my Federal and State tax liability by $1,500 or roughly 22% of the $6,700 investment.

The question is, do I fund the Traditional and save 22% off the top? In my mind that would be earning 22% right from the get go.

Or, do I take the $6,700 and fund the Roth and never pay taxes on the earnings, ever? Note: I reduce my tax liability by $200 funding the wifes Roth with just $2000. I plan to max it out.

I'm caught up in the fact that if I invest the $6,700 I will pay NO TAXES this year. But, I am not fully seeing the tax advantage of not ever paying taxes on the Roth earnings and paying relatively low taxes this year.

I know what I am going to do, I am just sharing and looking for opinions from all the people I respect here.

[nnuut]

Don't know it that is the correct title, but it works.

Here is the deal.

I am doing my tax return on TaxCut and playing with the IRA numbers.

If I invest $6,700 into mine and my wifes 2007 Traditional IRA I will reduce my Federal and State tax liability by $1,500 or roughly 22% of the $6,700 investment.

The question is, do I fund the Traditional and save 22% off the top? In my mind that would be earning 22% right from the get go.

Or, do I take the $6,700 and fund the Roth and never pay taxes on the earnings, ever? Note: I reduce my tax liability by $200 funding the wifes Roth with just $2000. I plan to max it out.

I'm caught up in the fact that if I invest the $6,700 I will pay NO TAXES this year. But, I am not fully seeing the tax advantage of not ever paying taxes on the Roth earnings and paying relatively low taxes this year.

I know what I am going to do, I am just sharing and looking for opinions from all the people I respect here.
Don't bother me with this stuff. talk to GAGrl!:D

[alevin]

Don't know it that is the correct title, but it works.

Here is the deal.

I am doing my tax return on TaxCut and playing with the IRA numbers.

If I invest $6,700 into mine and my wifes 2007 Traditional IRA I will reduce my Federal and State tax liability by $1,500 or roughly 22% of the $6,700 investment.

The question is, do I fund the Traditional and save 22% off the top? In my mind that would be earning 22% right from the get go.

Or, do I take the $6,700 and fund the Roth and never pay taxes on the earnings, ever? Note: I reduce my tax liability by $200 funding the wifes Roth with just $2000. I plan to max it out.

I'm caught up in the fact that if I invest the $6,700 I will pay NO TAXES this year. But, I am not fully seeing the tax advantage of not ever paying taxes on the Roth earnings and paying relatively low taxes this year.

I know what I am going to do, I am just sharing and looking for opinions from all the people I respect here.

Hey Show-Me, the way I've approached the question is to run numbers through calculators available on the web, that compare results and help identify assumptions that will help you determine which is more advantageous. If you type "Roth vs. Traditional IRA" into Google search engine, you'll see several calculators are available...

http://www.banksite.com/calc/rothira

http://www.dinkytown.net/java/RothvsRegular.html

From a general tax perspective, the Roth IRA is the better choice if your tax rate during retirement will not be lower than your current tax rate, as the Roth IRA allows you to pay the taxes now, and receive tax-free distributions when your income tax rate is higher. If your tax rate will be lower during retirement, then the Traditional IRA may be the better choice if you are eligible to receive a tax deduction now when your tax rate is higher.
from http://www.investopedia.com/articles/retirement/03/012203.asp

I'm sure you already have the answer figured out, but it's always nice to be able to get outside confirmation of your own judgement.;)

[GGal]

My thoughts:

Max any pre-tax plans to point of matching contributions first, then max roth, then max remaining pre-tax plans as funds allow.

Why? We are kidding ourselves if we think tax rates will be as low in the future as they are now.

GGAL

[Show-me]

My thoughts:

Max any pre-tax plans to point of matching contributions first, then max roth, then max remaining pre-tax plans as funds allow.

Why? We are kidding ourselves if we think tax rates will be as low in the future as they are now.

GGAL

Bingo! The voice of reason.


Thanks GG and alevin!

[Show-me]

alevin,

Nice links! Thank you!

[TonyMan]

I'm really new and could use some very specific advice. Where is a great place to set up a ROTH IRA where I can transfer in and out of the market without paying huge fees? :)

[Show-me]

What do you consider huge fees?

Scottrade charges $7 in and $7 out. A Mutal Fund may charge nothing but have restrictions on how often you can trade. Example: 1 trade every 60 days.

[eccougar]

Fidelity, Vanguard or T Rowe Price will have about any type of fund you would want.
Fidelity has many funds outside Fidelity, called superfunds, which you can also buy with no transaction fee.
Most of Fidelity funds you only have to hold for 30 days.

[TonyMan]

Thanks guys,

I was thinking of a true day trader scenario, where you jump in and out once in the same day. I guess you could do a self directed Roth IRA. I will search the archives here, before I ask anything that may have recently been covered.

[tspforretirement]

My thoughts:

Max any pre-tax plans to point of matching contributions first, then max roth, then max remaining pre-tax plans as funds allow.

Why? We are kidding ourselves if we think tax rates will be as low in the future as they are now.

GGAL


Hi GGAL,

Perfect point blank analysis.
I totally agree!

Hooah!

[tspforretirement]

I'm really new and could use some very specific advice. Where is a great place to set up a ROTH IRA where I can transfer in and out of the market without paying huge fees? :)


Hi TonyMan,

I am not sure what you are trying to achieve. I assume you are trying/looking for a brokerage Roth. (If wrong, then oopss.)

Personally, I have found that my bank offers fairly decent rates for trades within the Roth (and the more you make the less it costs). There is no limitations on trades (regardless, if it is a mutal fund, stock, or bonds), but watchout for the wash.

This sentence was going to be my disclaimer of why I am not mentioning the bank, but, what the heck.

The bank I am talking about is USAA, but, you have to meet the qualifications to join. You can go straight to USAA (it has an obvious URL), or check out Wiki.

[Show-me]

I'm sorry I missed your post Tony.

Any brokerage account will work, I use Scottrade.

Again, sorry I missed your original post.

[Bullitt]

Show-Me, what did you end up settling on?

Do you max TSP out before contributing to the Roth?

[Show-me]

I have come to the realization that I will never be rich, so maxing out the Roth is not as important to my situation. I put very little into the accounts right now, but I do have a few pieces of gold and silver that the Treasury knows nothing about.

My taxable income will never get to the point I will be hurting when I retire. By then I will, hopefully, have everything paid off and living on very little.

I am close but not there maxing out my TSP. My taxable income is the key. I max my FSA and over $400 a pp into TSP, I am one poor SOB. I have three Dependants for now. Two will leave the nest before I retire, I hope. lol That is when the tax man will come knocking.

I read a piece today about the Bush tax cuts expiring and how the Congress is posturing to extend the tax cuts only for the <$200k single and <$250k married. Mid-term election year ya know. ;) That proves to me that I will be okay.

[Bullitt]

Thanks for the insight. I'm pretty sure the reason why Schiff and pals recommend hard gold to the ETF's is because The Man will never know about it.

[Show-me]

The man need to keep his paws off my money. Being poor has its advantages. I have been buying bullion for awhile and almost sold my generic silver a few days ago when it got to $19. I was to slow. :(

I plan to buy more and it will be my reserve for my kids when I die. You have to be broke to go to the nursing home and they put a lean on all your assets. I would rather just die than let them dribble it away keeping me alive and captive. Cash and metal can't be traced. :D

Did you know that if you give you kid your assets while you are healthy that there is a 10 year grace period that the government can take it from your kid if you go to the nursing home within that 10 years.

[grandma]

Did you know that if you give you kid your assets while you are healthy that there is a 10 year grace period that the government can take it from your kid if you go to the nursing home within that 10 years.

Yes, and my understanding is they are quite good about digging it out - make take a few years; I didn't realize it is 10 years, tho, I had thought 5. The thinking is, you have to have an atty that is well versed on the second & third loopholes, which is how the richest of the rich manage to do all their stuff w/o taxes - expecially the inheritance tax.
This link http://tinyurl.com/y9yyu7y (http://tinyurl.com/y9yyu7y) article seems to believe that certain members of congress are working to slip that tax inheritance restart into the defense bill... Who is surprsed about that?
The article gives examples of what it does to the average owner-businessman's family. The bereaved can end up owing as much, if not more, than 3x's the worth...it is as if those particular congressmen are thinking they will each get a personal share of the dough!
So this is another event that needs assist to thwart the compassionless.
The bulk of the populace don't understand this pertains to them, they think it is a good thing d/t being for `those rich folks.' but like I mentioned - those rich folks have it well hidden/squirreld, etc. It is the guy down there on Main st that holds your check for you that gets it in the craw.:blink: (Yeah, I attended some kind of a lecture on this about 10 years ago - boy, were my eyes opened!)

[Show-me]

While we have moved into a different direction I would like to share a conversation I had with the same Nursing Home Administrator that told me about the 10 year rule.

Here is a link. He told me that in planning his parents estate this was the only known loophole in the system at least for the State of Missouri.

It is called a Irrevocable Trust.

http://www.ultratrust.com/revocable-trusts-vs-irrevocable-trusts.html

[Jackbnimble]

I have come to the realization that I will never be rich, so maxing out the Roth is not as important to my situation. I put very little into the accounts right now, but I do have a few pieces of gold and silver that the Treasury knows nothing about......


We know now.....

[grandma]

We know now.....

...but not just where it is buried !! :D

[Show-me]

Or, how many. :p

[Pill]

My thoughts:

Max any pre-tax plans to point of matching contributions first, then max roth, then max remaining pre-tax plans as funds allow.

Why? We are kidding ourselves if we think tax rates will be as low in the future as they are now.

GGAL


Thanks I keep needing to hear it, I know, but need to make the switch, maybe this year!

[James48843]

Or, how many. :p

Too late.

They know EVERYTHING now.

7661

[Show-me]

DAMN, I've been infiltrated. :nuts:


Too late.

They know EVERYTHING now.


7661

[Jackbnimble]

"You know what the difference is between you and me..... I make this look good." MIB:D

grandma, we have our methods. Show-Me, keep talking........

All, have a Merry Christmas.

[mudigha]

Well personally, this is what I do! I first Max out my Bonds. Which is 5000 per year. I max out the TSP of course 16500 or something like that. Since I have a child I also max out on FED spending plan which takes non taxed dollars out of your check and helps to pay for day care and medicine. I then can voucher what I spend and get my money back. so in total. 5K + 5K + 16.5K=26.5K. This drops me back into a modest tax bracket. I love it.

[Show-me]

Yea, I love tax season. By the time I deduct TSP and FSA, I'm so poor I barely pay any taxes. Now I just have to hide my retirement money. Roth TSP!

[Jackbnimble]

Well personally, this is what I do! I first Max out my Bonds. Which is 5000 per year.

mudigha, are you talking about Savings Bonds? If so I don't believe they come out pretax. Also, savings bonds would generally not be anywhere in my investment portfolio. It is convienient to have it taken out of your check, but the return on the EE bonds is lousy. I might understand the I bonds at 3% currently.
I am shring my opinion and I would like to hear your reasons for maxing out bonds? Also, are you using the I bonds and what purposes?

Thanks

Jack