The Tax Resources Blog

Posts Tagged ‘irs’

Tax Tables 2007 Irs

Question: What is the best way to reduce taxes through retirement plans?

I’m trying to find ways to reduce our tax liability as much as possible for next year’s return, as my husband found a job after finishing college this year and our combined income should be about $102,000 come next April 15.

I earned about $60,000 last year and as joint filers, we got back $1600 from the IRS for 2007. According to the tax tables, (at our current W-4 exemptions) we should owe IRS about $1200 next year if we don’t do anything, so I’m trying to find out which retirement plan we should go with . Roth IRA or regular IRA?

Roth IRA sounds appealing because the contributions are deductible for now, but what about the taxes on the distribution in 25 years when we expect to retire? Is there a whole lot of difference in the amounts between Roth and traditional IRA when we finally get the money at retirement?

Thanks guys.

Answer: You’ve got it backwards. A Roth is NOT deductible now. The benefit of a Roth is that it is TAX FREE upon withdrawal if you are over age 59 1/2 when you retire.

A Traditional IRA will give you tax savings now but it’s taxable as ordinary income when you withdraw the funds.

If you’re young, a Roth will be the FAR better deal in the long run. If you’re nearing retirement and expect your income to drop significantly when you retire, then a Traditional IRA is better for you in most cases.

However with your incomes, IRAs are not the best bet. You can contribute MUCH more income into a 401(k) at your work — up to $15.5k per year, plus whatever matching contributions your employer’s make. If your employers offer 401(k)s then you should contribute at least enough to get the full employer match as that is FREE money once it’s vested. That skews the comparison with a Roth IRA because of the extra employer match. The best in the long run would be a Roth 401(k) if your employer offers it. They’re pretty new still and many employers don’t offer them yet but if it’s available then that would be the hands-down long-term winner for you.

Also, you may be limited on the deductibility of an IRA due to your income if your employers offer retirement plans.

Don’t let current tax savings cloud your judgment! Consider the tax consequences but choose based on maximizing your wealth, NOT just saving taxes! It’s very easy to be “Penny wise & Pound foolish” if you look only at the current tax burden.

10 yr. old Jashaun 2007 Christmas AAU 6th grade part 1