Wednesday, June 27, 2012

Should I take a tax break now or later?

I was thinking a little more about investing in my Roth IRA. Last year I was very motivated to full fund my IRA, but this year I am not nearly as excited. I only make about $20,000 in take home pay a year, so fully funding my IRA would be about 25% of my take home income. It's tough to dump a week's worth of my earnings each month into an account that might lose money or I may never use again (what if I die before I retire?). Another thought I had is now that my husband is making more money that means more taxes. I don't know how successful I was at suggesting he change his tax allowances from a 2 to a 1 because I have a feeling they won't take out enough if he left it at a 2. So I had an idea. I should maybe look into a traditional IRA instead of continuing to fund my Roth. I wouldn't have to invest as much money because I could deduct some of that on my taxes. So if I invested $5,000 in a traditional IRA, our taxes would be about $1,250 less. Putting $3,750 in the IRA doesn't hurt quite as much as $5,000. Yes, I know I'd owe taxes on it when I withdrew it, but honestly I kind of think we could be in a lower tax bracket during retirement than we are now or least it'll be the same as it is now. We won't need as much income if we don't have a mortgage and the expenses of commuting to work every day. So anyway, I thought I'd take a look at seeing if I could open a traditional IRA and saw this:

My husband and I combined made just a bit over the $100K last year, and with this new job our combined income will likely be in the $100,000 to $110,000 range going forward. So at first I thought it looks like the money invested into a traditional IRA would not be tax deductible anyway. According to this post at, it says the tax deduction is phased out if your income is between $90,000 to $110,000 (after $110,000 you wouldn't get any deduction) and your employer offers a retirement account. Well the first thing I wondered is what if your husband is offered a retirement plan at work but you are not?

After some more research, it looks like I might have found the answer at this website because it says "if you are married filing jointly and your spouse is covered at work, then your deduction limits start phasing out at an adjusted gross income of $169,000 and top out at $179,000." So that is good news - it looks like I still eligible for a tax deduction if I start a traditional IRA.

Another thing to concider is just like you need to diverify your investments (stocks, bonds, large cap, small cap etc.) tax diversifation is a good idea too. For me currently I have a small Simple IRA from an old job that will be taxed at retirement, but the majority of my retirement is in the Roth IRA. However, when we look at my husband's retirement accounts it is all in a tax deferred 401(k). So is that enough tax diversifaction?

What are your thoughts on this? Is opening a traditional IRA for the tax deduction now a good idea? I know almost all the financial experts suggest opening a Roth over a traditional. But, I'd rather take that tax deduction now.

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