Any tax savvy riders out there that can answer a tax question ?

[C908]

Well I can't ride today so I'm working on my taxes. I'm confused on the IRA contribution part. If I take money that I have already paid state and federal taxes on and then I contribute it to an IRA I understand that gets me a tax credit. According to Turbo Tax if I contribute $6,000.00 it gets me an extra $1,000.00 back this year. My question then is in 5 years  when I am 62  if my only income is social security and I decide to take it back out approximately how much of that $1,000.00 savings will I pay back in taxes. The way I see it is my $6,000.00 contribution saved me 16 1/2% when I factor in the extra $1,000.00 I got back. So the percent I'm being taxed when I take it back out needs to be for less than 16 1/2% to make it profitable. I guess what is confusing to me is I paid state and federal taxes when I earned the money and then I'm going to pay taxes again when I take it out of my IRA. The way I see it is I paid taxes twice but only received credit once. Am I missing something? I already asked my IRA person at the bank and they said ask a tax person so I called H & R Block and they wouldn't give me a straight answer. I've found when in doubt ask my friends on the Valkyrie board. Thanks for any information that might be of help. 

[flcjr]

I am not a cpa but I believe if you wait until your 62 or 65 to take it out you will not have to pay any taxes on it. but thats only what I've been told and the tax law changes every year. I would call a local cpa not H&R but real one.

[Jess from VA]

Personally, I think you are better off putting that money in a Roth IRA, for which you get no tax credit now (as in a Traditional IRA, IF you (and your spouse) don't exceed the income levels), but when you take the money out (after 59.5) there are no taxes on either the contribution or the earnings. 

You will pay taxes on the contribution and earnings from a Traditional IRA withdrawl, based on all income reported in the year you take it, but I cannot say how much.  The tax rates and rules can change before that happens.  That should not happen with ROTH IRAs (unless the liberals remain in power).

[Sergeant D]

Don't confuse paying taxes with having deductions being taken from your check to pay taxes at the end of the year.  You only pay Federal Income tax once a year, when you file your 1040 (whichever).  The amount of amount taken out of your check weekly, bi-weekly, whatever is just a holding until you file your taxes.  A tax refund is just returning money to you in which you overpaid.  Social Security isn't a tax, but it is taken as you earn it.  Money, that hopefully you will see again as you retire at the appropriate age.

If you think or know that your income will decline after you retire, go the Traditional IRA to save more money, the $1000 you get now.   If you have been saving huge sums of money and your nest egg is now larger than your annual income, which you can withdraw from and still have a large sum, the go the Roth route and pay the tax now, with the intent of free earnings.

As Jess from VA stated, that is all based on the "current" tax law, and is subject to change by congress. 

You will pay tax based on whatever rate they set for whatever income level in the future.  So how much tax WILL you pay....you can use the current tax table to best guess it, but realistically, the tax rate will rise in the future just to cover the over spending that congress does.  Hope that helped...

[old grouch]

I am NOT a CPA.  That being said, I will try to help with your question.  Your IRA contribution does not give you a tax credit.  The money that you contribute to a traditional IRA is not taxed in the year that you earn it.  It is deducted from your taxable income before your tax is computed, up to a limit on your total income.  Don't know what the limit is for 2011. That is why you get back the extra $1000.   The IRA contributions, along with any earnings, are tax deferred, meaning that you pay taxes in the year that you draw it out, when, presumably your income is lower than when you put it in, thereby placing you in a lower tax bracket, which in turn should result in your paying less tax on that money when you spend it than you would have when you earned it.  Don't know what state you are dealing with, but Colorado uses your Federal taxable income, with certain additions and subtractions to compute the State taxable income, so the same thing holds true there.  What Jess said about a Roth IRA is also true.  Because you have already been taxed on Roth contributions, you don't get any tax advantage in the year of contribution, but  you pay NO tax on your withdrawals, which means your earnings grow tax free. A word about withdrawals from IRA accounts.  If you withdraw from an IRA before you reach age 59 1/2 and have had the account in existence for at least five years you may (almost certainly will) be subject to a penalty in the amount of 10% of the amount withdrawn plus the taxes on the withdrawal.  As to which is best, it depends on your situation.  For example, if you expect your income to remain near present levels throughout your life, and if you can invest in something that will truly outpace inflation, the Roth makes more sense for sure.  If you expect a significantly lowered income level after retirement, resulting in a significantly lower tax bracket, and the lower tax/higher refund is important now, the traditional does.  "PERSONAL OPINION FONT ON"  Whether you contribute to a Traditional, a Roth or none at all, you should try to adjust your withholdings (form W-4) so that you receive the smallest refund possible when you file your taxes, or even end up owing a small amount.  Compute the difference and put it in an insured money market account at your bank/credit union and use it to pay what you owe at tax time.  You don't want to owe too much, since there are underpayment penalties.  A large refund means that the Feds have been using your money all year without paying you any interest.  You could be getting maybe 1/2% in a money market account.  Not much but better than letting them use it for free.   You will not be able to to do this if you have large tax credits, such as "Credit for Child Care"  "Child Tax Credit"  "Additional Child Credit"  "Credit for Higher Education" and/or others in the much too long list.  "PERSONAL OPINION FONT OFF"   You can go to here   http://www.irs.gov/pub/irs-pdf/p590.pdf    and read the publication pertaining to IRAs for more clarification.  Actually lots of helpful info on the IRS website.  I really mean that last.  Hope this has been helpful and not too long-winded.  Stan 

[old grouch]

I sent you a PM.  Stan

[RDAbull]

I am NOT a CPA.  That being said, I will try to help with your question.  Your IRA contribution does not give you a tax credit.  The money that you contribute to a traditional IRA is not taxed in the year that you earn it.  It is deducted from your taxable income before your tax is computed, up to a limit on your total income.  Don't know what the limit is for 2011. That is why you get back the extra $1000.   The IRA contributions, along with any earnings, are tax deferred, meaning that you pay taxes in the year that you draw it out, when, presumably your income is lower than when you put it in, thereby placing you in a lower tax bracket, which in turn should result in your paying less tax on that money when you spend it than you would have when you earned it.  Don't know what state you are dealing with, but Colorado uses your Federal taxable income, with certain additions and subtractions to compute the State taxable income, so the same thing holds true there.  What Jess said about a Roth IRA is also true.  Because you have already been taxed on Roth contributions, you don't get any tax advantage in the year of contribution, but  you pay NO tax on your withdrawals, which means your earnings grow tax free. A word about withdrawals from IRA accounts.  If you withdraw from an IRA before you reach age 59 1/2 and have had the account in existence for at least five years you may (almost certainly will) be subject to a penalty in the amount of 10% of the amount withdrawn plus the taxes on the withdrawal.  As to which is best, it depends on your situation.  For example, if you expect your income to remain near present levels throughout your life, and if you can invest in something that will truly outpace inflation, the Roth makes more sense for sure.  If you expect a significantly lowered income level after retirement, resulting in a significantly lower tax bracket, and the lower tax/higher refund is important now, the traditional does.  "PERSONAL OPINION FONT ON"  Whether you contribute to a Traditional, a Roth or none at all, you should try to adjust your withholdings (form W-4) so that you receive the smallest refund possible when you file your taxes, or even end up owing a small amount.  Compute the difference and put it in an insured money market account at your bank/credit union and use it to pay what you owe at tax time.  You don't want to owe too much, since there are underpayment penalties.  A large refund means that the Feds have been using your money all year without paying you any interest.  You could be getting maybe 1/2% in a money market account.  Not much but better than letting them use it for free.   You will not be able to to do this if you have large tax credits, such as "Credit for Child Care"  "Child Tax Credit"  "Additional Child Credit"  "Credit for Higher Education" and/or others in the much too long list.  "PERSONAL OPINION FONT OFF"   You can go to here   http://www.irs.gov/pub/irs-pdf/p590.pdf    and read the publication pertaining to IRAs for more clarification.  Actually lots of helpful info on the IRS website.  I really mean that last.  Hope this has been helpful and not too long-winded.  Stan 

I am a CPA, and the old grouch is correct.
The only thing that I would also toss in is it would depend on your age, risk tolerance, income now and what you expect in retirement and a few other things as whether a Roth or Traditional IRA would be better.  And be careful where and how you invest the IRA money.  Return OF your money is more important than return ON your money.  (thank you Ben Franklin)

[C908]

Thanks guys for all the good information,I will think about it when I go riding and make my decision.