Open Traditional IRA to increase tax return?

[Anonymous]

I just met with my accountant to file taxes and found out that I will not be getting much of a return because of my salary ($89,000). After his calculations, I will be receiving approximately the following:

Tax Return
Federal: $460
NY State: -$320 (owe money)
Total tax return: $140

He suggested that if I made a $5,000 contribution to a traditional IRA that would increase my tax return. This is what my tax return would be:

Tax return (with $5,000 Traditional IRA contribution)
Federal: $1,730
NY State:  $210
Total tax return: $1,940

I already have a fixed annuity ROTH IRA with $3,861. I was wondering if opening a traditional IRA just for a bigger tax return now will hurt me in the future? Should I just make a contribution to my ROTH as planned? I am 27 years old and do not have a 401k or any additional retirement accounts.

[haulingthescoreup]

Wow, anything you can start now, I would do so.

I'd first max out the Roth, and then fund a traditional IRA, but your accountant has a better idea of your finances.

But the younger you can get these started, the better you'll be in the long run.

If I only had a time machine...

[Lel]

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@Anonymous wrote:

I just met with my accountant to file taxes and found out that I will not be getting much of a return because of my salary ($89,000). After his calculations, I will be receiving approximately the following:

Tax Return
Federal: $460
NY State: -$320 (owe money)
Total tax return: $140

He suggested that if I made a $5,000 contribution to a traditional IRA that would increase my tax return. This is what my tax return would be:

Tax return (with $5,000 Traditional IRA contribution)
Federal: $1,730
NY State:  $210
Total tax return: $1,940

I already have a fixed annuity ROTH IRA with $3,861. I was wondering if opening a traditional IRA just for a bigger tax return now will hurt me in the future? Should I just make a contribution to my ROTH as planned? I am 27 years old and do not have a 401k or any additional retirement accounts.

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I don't know what you mean by "fixed annuity Roth IRA" - does that mean that you've already made $3861 in Roth IRA contributions?

If so, then you can only contribute $5000 - $3861 = $1139 to a traditional IRA for the 2008 tax year.

Remember, the advantage to having a Roth IRA is that if you think that at retirement you're going to be in a higher tax bracket, then it's better to pay the income tax up front and get tax-free distributions when you retire. If you think that you will be in a lower tax bracket at retirement, then it's better to take the tax deferral that goes with a traditional IRA.

[Anonymous]

Sorry that I was unclear. I meant that I already had an IRA account and there is currently $3,861 in the account. I just wanted to indicate that I didn't have very much in it and to convey that I wanted to work on putting more money in it as opposed to starting a new Traditional IRA. I have not made a contribution to my ROTH for 2008.

My concern was getting an increased tax return by opening a traditional IRA may be great for now but wouldn't be beneficial to me in the long run when I withdrawal the money. I am going to continue with contributing to my ROTH.

haulingthescoreup and Lel, thanks so much for your help!

[Lel]

Yeah, you're a kid , you've got a long time to go and with your current income (nice), you could be looking at high tax rates at retirement.  Good for you thinking about retirement early.  You won't be able to count on Social Security (which is due to run out the year I retire).

[KingAdrock]

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@Lel wrote:

Remember, the advantage to having a Roth IRA is that if you think that at retirement you're going to be in a higher tax bracket, then it's better to pay the income tax up front and get tax-free distributions when you retire. If you think that you will be in a lower tax bracket at retirement, then it's better to take the tax deferral that goes with a traditional IRA.

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Don't forget that with a Roth all the interest that grew over the years is tax free.