IRA Contributon vs. Fed Income Tax

[CG6468]

In years past, I think I remember being able to contribute the amount of Fed income tax you have to pay to an IRA instead, eliminating the payment to the Feds.

Anyone know anything about this?

We've haven't had to pay the Feds any additional income tax in over 20 years, but this year, with my wife retiring, some cash from her job benefits were deposited in our checking account, with no taxes withheld.

It's not the end of the world, but I'd sure like avoid paying the Feds $1400 more than they already took. It would look much better in one of our IRAs.

I'm using TurboTax, but I can't find the answer there.

[Rugnuts]

i just did my taxes on turbotax
at the end while your about "file" to the fed, it said something about that. i just skipped it. but i think if you just keep going you might see it.

i thought it was allowing you to pay into a IRA to knock down your tax liability. i dont think it allows you to pay your liablilty to a IRA.

IIRC, there is a $5000 annual limit to an IRA.

[DumbAss Tanker]

Correct, Rugnuts, qualifying IRA contributions are adjustments to income (They reduce the total taxable income before taxes due are calculated), not a credit that directly dollar-for-dollar reduces the bottom-line tax due amount. 

[NHSparky]

Difference between Traditional IRA versus a Roth IRA.  The traditional is pre-tax contribution, but will have taxes taken out when you make the withdrawl, plus any applicable penalties if taken before 59 1/2.  Roth IRA contributions are post-tax earnings, meaning you can't deduct them, but the money in the Roth, including earnings/interest, are tax-free, and as long as you've had the IRA for at least 5 years and are over 59 1/2, no penalty either.

Difference being tax-DEFERRED (Traditional IRA) versus tax-EXEMPT (Roth).  Either will allow withdrawls up to $10K for first-time homebuyers.

And if you're willing to pay taxes (but no penalty) you can roll over your Traditional into a Roth if so desired and you don't take too big of a hit.

There are income limits to IRA's which I'm not entirely sure of, but IIRC, it's about $105K for single and $165K for married couples (above that no breaks.)

As with 401(k)'s there are contribution limits based on whether you're over or under 50 years of age.  For an IRA (traditional or Roth) it's $5K if under 50, $6K if over 50--but that's combined, so if you have one of each you're limited to $5/6K for your total contribution to both accounts.  Compare this to the max 401(k) contribution of $16,500 if under 50, and $22,000 if over 50.

BTW--there are also Roth 401(k)'s.  Still with me, right?  Simple, ain't it?

[Rugnuts]

key to the IRA's

if you think tax rates are going to go UP before you retire, get the ROTH (pay at todays rate)
if you think they are going to go down, get the Traditional.

[NHSparky]

key to the IRA's

if you think tax rates are going to go UP before you retire, get the ROTH (pay at todays rate)
if you think they are going to go down, get the Traditional.

I would go even further than that, rug--

Small amounts in a 401(k) and Roth IRA starting as soon as one hits the workforce, and possibly some tax-free municipal bonds for a long-term investment.  Build up more as you can afford it.  By the time you hit your 50's, you won't have to put anything in if you don't want or need to.

I read somewhere once that if you contributed so much money to an account from the ages of 20-25 and never put another dime into it after that, you'd have MORE money than if you had started at age 30 and gone to retirement contributing the same amount.

So what it really boils down to is 1--start early, 2--DON'T EVER TOUCH IT.  Manage it, yes, but don't withdraw it.

[CG6468]

Thanks for the input, everyone. I appreciate it.

[obumazombie]

Thanks for the input, everyone. I appreciate it.

Yes, very good info.