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Does this make sense?
Old 02-08-2007, 08:21 AM   #1
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Does this make sense?

Just ran through my taxes. Does it make sense to contribute $4500 to an IRA to save a liittle more than $1100 in taxes. Won't that money, which is post tax just be taxable again? I am retired, but will probably have come minor income this year. Thanks.

setab
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Re: Does this make sense?
Old 02-08-2007, 08:26 AM   #2
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Re: Does this make sense?

That depends on what your tax rate is when you withdraw the money. If thats 20 years from now and you'll be living off your investments, chances are your tax rate might be lower than today.

That having been said, $1100 bucks probably wont kill you either way.

I'm not a big fan of paying taxes unless you have to, although I wouldnt cut my nose off to spite my face, as my gramma used to say. Its like paying a huge, worthless ER on your investments.

Maybe at this point since you're already retired, your taxable income is already where its going to be. Maybe your best bet is to pay the taxes, put the excess money into a Roth and withdraw the appreciated amount tax free in 10-20 years.
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Re: Does this make sense?
Old 02-08-2007, 08:36 AM   #3
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Re: Does this make sense?

Why do you say the money is post tax?

I am retired too but am expecting maybe $15,000 of income this year on my share of some deals of mine that paid after year end. I was thinking I would drop that all into my 401k and none would be taxable. But we could do a Roth this year and our taxable income shouldn't be big so I am somewhat torn as to whether to put it in the 401k or start a Roth or do some combination, though it does seem to be somewhat of a PITA to have a Roth with not very much money in it.
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Re: Does this make sense?
Old 02-08-2007, 09:04 AM   #4
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Re: Does this make sense?

Quote:
Originally Posted by setab
Just ran through my taxes. Does it make sense to contribute $4500 to an IRA to save a liittle more than $1100 in taxes. Won't that money, which is post tax just be taxable again? I am retired, but will probably have come minor income this year. Thanks.

setab
Setab,

It can't be BOTH post-tax AND save you $1100 in taxes. If what you mean by "post tax" is that you are making a non-deductible IRA contribution, then you don't save anything in taxes now and this money will not be taxed again when you withdraw it. You will have a "basis" in the IRA. Note that you can only contribute to an IRA up to the legal limit OR up to the level of your "earned income", whichever is less. So if you don't have $4500 in earned income (not pension, Social Security, interest, dividends or capital gains) then you can't make the contribution at all. If you are eligible for a deductible IRA contribution and you don't need the money for current expenses, it is probably a good move.

If this is a deductible IRA contribution, then the amount contributed reduces your taxable income and you do, in fact, save on current year taxes. Those funds will be taxed on withdrawal from the IRA but will enjoy tax deferred growth in the meantime.

Grumpy

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Re: Does this make sense?
Old 02-08-2007, 09:12 AM   #5
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Re: Does this make sense?

I think what he's saying is that he's got a lump of cash, can contribute it to an IRA and then write it off as an IRA contribution, reducing his taxable income by that amount, and reducing his tax load by $1100.
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Re: Does this make sense?
Old 02-08-2007, 09:25 AM   #6
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Re: Does this make sense?

Quote:
Originally Posted by Martha
Why do you say the money is post tax?

I am retired too but am expecting maybe $15,000 of income this year on my share of some deals of mine that paid after year end. I was thinking I would drop that all into my 401k and none would be taxable. But we could do a Roth this year and our taxable income shouldn't be big so I am somewhat torn as to whether to put it in the 401k or start a Roth or do some combination, though it does seem to be somewhat of a PITA to have a Roth with not very much money in it.
If you can do Roths for both you and Greg, I would. That 10K could easily be a new car in just a few years Martha. The compounding can be awesome and it can be a minor emergency slush fund which is nice to know is there. Just my .02 cents. Were you to do some modest conversions over time it gets sweeter and then it would not be the PITA with little money.
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Re: Does this make sense?
Old 02-08-2007, 12:04 PM   #7
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Re: Does this make sense?

Quote:
Originally Posted by Martha
I am retired too but am expecting maybe $15,000 of income this year on my share of some deals of mine that paid after year end. I was thinking I would drop that all into my 401k and none would be taxable. But we could do a Roth this year and our taxable income shouldn't be big
If your total income is $15000, I would think you could put $3400 in the Roth completely tax free.
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Re: Does this make sense?
Old 02-08-2007, 12:20 PM   #8
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Re: Does this make sense?

The 15,000 is earned income. We will still have interest and dividend and capital gain income, but our bracket should be considerably lower than in the past.
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Re: Does this make sense?
Old 02-08-2007, 12:28 PM   #9
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Re: Does this make sense?

It's earned income. It is a lump I have in a money market at the moment, but I understand the point. Taxes were already withheld on it, but Iunderstand what you are saying. Thanks for helping me sort it out.

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Re: Does this make sense?
Old 02-08-2007, 12:41 PM   #10
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Re: Does this make sense?

So what do you think you are going to do? Roth it?
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Re: Does this make sense?
Old 02-08-2007, 04:32 PM   #11
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Re: Does this make sense?

Roth appears to make more sense to me. I'll just have to suck it up and pay the taxes now. Interesting though. I had minimal earned income after March 3 last year when I retired and had more total income on the 1040 than any previous year. Maybe I should have retired sooner!
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Re: Does this make sense?
Old 02-08-2007, 04:35 PM   #12
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Re: Does this make sense?

Isnt it a tough problem when you find you've got a bunch of money hanging around and cant figure out what to do with it
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Re: Does this make sense?
Old 02-09-2007, 08:59 AM   #13
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Re: Does this make sense?

It's all you can do when the wind chill is minus 35! Good point, though.

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Re: Does this make sense?
Old 02-09-2007, 11:43 AM   #14
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Re: Does this make sense?

I might dump all my money into the 401k. If I did that, does anyone know if I could still make a Roth contribution or do I have to hold all my contributions so they do not exceed earned income?

I know I could look for an answer, but if anyone knows off the top of their head. . .
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Re: Does this make sense?
Old 02-09-2007, 11:49 AM   #15
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Re: Does this make sense?

Quote:
Originally Posted by Martha
I might dump all my money into the 401k. If I did that, does anyone know if I could still make a Roth contribution or do I have to hold all my contributions so they do not exceed earned income?
The Roth limit depends on W-2 income. If you dump it all into the 401(k) then you won't have any W-2 income and your Roth limit will be zero.

My spouse's TSP allotment claims that it'll take 92% of her Navy Reserve pay until she hits her $15K limit, at which point it'll "automatically" redirect her pay to her direct deposit checking account where I can sweep $4K into a Roth. We'll know in about nine months how well that's working.

I don't want to tell you how I made this mistake realized this...
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Re: Does this make sense?
Old 02-09-2007, 02:02 PM   #16
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Re: Does this make sense?

Quote:
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The Roth limit depends on W-2 income. If you dump it all into the 401(k) then you won't have any W-2 income and your Roth limit will be zero.
You sure about this ? They talk about "compensation income", but it's not clear
from my reading if income earned at a job doesn't count just because you deferred
it all into a 401K.

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Re: Does this make sense?
Old 02-09-2007, 02:24 PM   #17
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Re: Does this make sense?

Quote:
Originally Posted by RustyShackleford
You sure about this ? They talk about "compensation income", but it's not clear from my reading if income earned at a job doesn't count just because you deferred it all into a 401K.
When it comes to the military version of the TSP and W-2s I'm extremely sure. However I've been wrong before in the areas outside my experience.

Last year spouse earned less total base pay than the TSP's $15K contribution limits. She ended up with about $10K of TSP contributions and about $3700 in her checking account. Her W-2 shows only the $3700 in Block 1, although it notes that her SS/Medicare wages were about $13.7K. So we didn't even max out her Roth contribution, let alone get started on mine.

Spouse just got paid for a pile of 2007 drills. The amount of the pay was $1119.36. $1029.80 went to the TSP, $85.64 went to FICA (7.65%), and $3.92 went to her checking account. Her "Income YTD" block of her LES shows the $3.92, it'll eventually be in Block 1 of her W-2, and that's what the IRS will check against her IRA contributions.

Although I hesitate to apply logic to federal legislation or IRS regulations, Roth IRA contributions are intended to be made with after-tax dollars. It wouldn't be fair to the intent of the legislation if you were able to put before-tax dollars into a tax-deferred account and double-book those same before-tax dollars into a Roth.
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Re: Does this make sense?
Old 02-09-2007, 08:04 PM   #18
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Re: Does this make sense?

I'm almost 99% sure that money put into a 401k can not then be re-used as 'earned income' to fund a roth.

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Re: Does this make sense?
Old 02-10-2007, 08:55 AM   #19
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Re: Does this make sense?

Of course you guys are right, I was just hoping.
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