"tina" <tinamseaburn[at]excite.com> wrote:

- quote -

All regular IRA's are paid with after tax dollars. Just
think of it as getting "untaxed" by deducting it this year.
Then when you distribute it, its "retaxed":-) Also, be aware
of the limits, especially if you participate in a pension
from your part-time work!

Mike Lewis, CPA

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tina <tinamseaburn[at]excite.com> wrote:

- quote -

That makes the $9,000 pre-tax money.

- quote -

You're taking $9000 off your taxable income this year, and
adding $9000+earnings to your taxable income sometime in the
future.

What do you expect your future tax rate to be?

Do you expect to be withdrawing more than the amount that
costs additional taxes? (Something like $130,000/year, I
think.) If so, putting more money in isn't a good idea.

If your future tax rate will be the same as your current
one, and you won't be up against that limit, you'll do a bit
better putting the money into your IRA.

Seth

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Here's one way to look at it: The money is coming from your
W2 income, not from your savings account. If you put the
money in traditional IRA's (as a prior year contribution),
you could think of it as designating $9,000 of your earned
income as tax-free this year. Saves you circa $2,250 on
your 2005 federal taxes--you are essentially paying yourself
instead of paying the government that money. You'll pay
Uncle Sam later, but that money has a chance to grow
tax-free in the meantime.

What is your age? A Roth IRA may make more sense if you are
within a few years of age 70 and a half. If you are still
working, you can continue to contribute to the Roth and
won't be forced to withdraw the money.

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tina wrote:

- quote -

Depends.
If you are in the 25% braket (taxable income over $59,400),
you would take $9000 and shifting accounts, find you get a
$2250 refund. That sounds smart to me.

As long as you leave it invested until you have no PT income
and your bracket drops, to 15%, taxable income from about
15K to 59K, you then would owe $1350 as the $9,000 came out.

You still need to decide how to invest the money. An IRA can
be in Stocks, bonds, CD, money market.

Whatever you do, do not let anyone sell you an annuity
inside the IRA. You don't put a tax deferred investment into
a tax deffered account. I've run into too many people with
that issue, lately.

JOE

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"tina" <tinamseaburn[at]excite.com> wrote:

- quote -

If the $9000 is deducted from your taxable income, then it
is pre-tax money now and taxable when it is withdrawn.

If the $9000 is nondeductible, then it is added to the basis
of the IRA on form 8606 and is not taxed on withdrawal.

In either case, you are shifting $9000 from your savings
where income is taxable to the IRA where income is tax
deferred.

Whether it makes sense depends on your current and future
tax status. If you have no taxable income now, the tax
deduction and deferral of the IRA does you no good.

In any case, there is no double taxation of the funds.

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tinamseaburn[at]excite.com (tina) posted:

- quote -

Assuming your AGI is exactly $90,000 and you are MFJ, taking
standard deduction, your taxable income would be $73,600
(90K, less 10K, less 6.4K). On amounts over $71,950, the
effective tax rate is 28%.

Thus, the first $1,650 of your IRA deduction would save you
$462 in taxes. The remaining $7,350 would save you $1,838
(effective rate of 25%) -- for a nice round total of $2,300.
Now, if that $9,000 is currently invested in a Money Market
Fund, it's probably "earning" approximately 4% -- or $360.

Looked at that way, it seems you'd get a fantastic ROI
immediately (about 26%). And, of course, it's not
unreasonable to assume that the eventual taxes you would owe
when you take distributions from those IRAs, would be
taxable in a lower bracket -- perhaps only at 15%.

But there's always that nasty Congress, and tax laws can
change. So as the saying goes, "you pays your money and
takes your chances" -- and things will be whatever they will
be.

Good luck, whatever you decide.

Bill

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I'm semi-retired now and although I'm still earning around
$90,000 per year from my part time work and my pension, I'm
spending more than I make. If I buy two $4,500 IRAs (for
the 2005 tax year) for both me and my spouse I will be
buying it with money in my after-tax savings amount (sort
of). So, I'm taking after tax money and making it taxable
again when I take those IRA funds in future years. But I'll
pay less taxes this year.

Or, you could say, I'm forcing myself to go $9,000 more into
my savings because I'm buying those two IRAs from my pre-tax
income money.

I'm not sure it's smart for someone who is spending savings
to buy IRAs.

Am I making any sense?

I would welcome the opinion of others on this issue.

--
Regards,
T

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