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Thread: Reducing Tax Liability

  1. #1

    Join Date
    Sep 2004
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    Arrow Reducing Tax Liability

    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.
    Socrates: "Democracy, which is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequaled alike."


  2.  
  3. #2

    Join Date
    Jun 2004
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    Boiled Peanut, Georgia, USA
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    Default Re: Reducing Tax Liability

    Quote Originally Posted by Show-me View Post
    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!



  4.  
  5. #3

    Join Date
    Dec 2007
    Location
    inland Northwest
    Posts
    4,124

    Default Re: Reducing Tax Liability

    Quote Originally Posted by Show-me View Post
    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.../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.

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  7. #4

    Join Date
    Feb 2005
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    USA
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    1,132

    Cool Re: Reducing Tax Liability

    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
    Where's Ronald Reagan When We Need Him!!!

  8.  
  9. #5

    Join Date
    Sep 2004
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    Missouri
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    Default Re: Reducing Tax Liability

    Quote Originally Posted by GGal View Post
    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!
    Socrates: "Democracy, which is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequaled alike."

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  11. #6

    Join Date
    Sep 2004
    Location
    Missouri
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    Default Re: Reducing Tax Liability

    alevin,

    Nice links! Thank you!
    Socrates: "Democracy, which is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequaled alike."

  12.  
  13. #7

    Default Re: Reducing Tax Liability

    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?

  14.  
  15. #8

    Join Date
    Sep 2004
    Location
    Missouri
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    Default Re: Reducing Tax Liability

    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.
    Last edited by Show-me; 02-06-2008 at 11:23 AM. Reason: 60 days not 60 months. LOL
    Socrates: "Democracy, which is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequaled alike."

  16.  
  17. #9

    Default Re: Reducing Tax Liability

    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.


  18.  
  19. #10

    Default Re: Reducing Tax Liability

    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.

  20.  
  21. #11

    Join Date
    Sep 2007
    Location
    U.S. Army Retired
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    44

    Default Re: Reducing Tax Liability

    Quote Originally Posted by GGal View Post
    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!

  22.  
  23. #12

    Join Date
    Sep 2007
    Location
    U.S. Army Retired
    Posts
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    Default Re: Reducing Tax Liability

    Quote Originally Posted by TonyMan View Post
    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.

  24.  
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