Tax Questions/ Comments

[Gemini9981]

Hi everyone,

I am working on my taxes and need some advice. First, I have been thinking of opening an IRA for myself for a while now and now that I see how much is taken out for taxes, I think maybe it is a good time to do so. I know everyone says Roth IRA's are better, but I would not be able to deduct the amount I put into one of those, right? Thus, I am having a hard time seeing how they are better. My husband recently opened a Simple IRA with his job. I thought his contributions would be deductible, but what I have been reading leads me to believe they are not. Our combined income for 2006 was in the 60s, so we would not qualify for the retirement savings credit. I am thinking of opening an IRA for myself to reduce our tax liability. Do you think this is a good idea? With our income, would a Roth or Traditional IRA be better? Also, if you know of a way to deduct Simple or Roth IRAs, let me know.

On another note, I am amazed out how much is being taken out for taxes, especially for state and local taxes (I live in Maryland). State taxes are about the same amount as Federal. We just moved here a year ago from Florida where we had no state tax. I really regret becoming a Maryland resident now. Another thing that is bothering me is that interest income is not only taxed by the federal government but by the state government. I have most of my money in Money Markets and CDs. Now that we have moved to Maryland and also since my interest earnings have increased, being taxed on interest is really bothering me. Any advice on where else to put the money and earn about 5% in a tax-exempt account is greatly appreciated.

Gemini

[sweeps]

If you're looking to reduce your immediate tax liability, a Roth IRA isn't the answer. But the Roth IRA has the advantage of not being taxed when you withdraw later. A 401k or traditional IRA gives you a deduction in the year that you contribute, but when you withdraw later, you earnings will be taxed.

With an income in the 60's your effective tax rate is really not that high. Particularly if you believe your income will rise, a Roth IRA is probably the best bet.

You could avoid state and local taxes by putting your money in T-Bills. They are very competitive with high-interest savings accounts.

[Gemini9981]

Thanks for your help, sweeps!

Where can I get a T-bill??

[kv968]

Originally Posted by Gemini9981

Thanks for your help, sweeps!

Where can I get a T-bill??

You could go here http://treasurydirect.gov/ to purchase them online or you could go to a bank. You could also invest in a MD tax-free bond fund such as these from T Rowe Price (MDXBX or PRMDX) or a MD tax-free money fund (TMDXX).

However as sweeps pointed out you're not really in that high of a tax bracket. The money you put into those funds isn't tax deductable either, just the interest you earn. You also have to take into consideration that although the interest earned would be state and local tax-free, would you still make more money overall getting a higher rate while paying the taxes? For people that aren't in higher income levels it's usually more beneficial for them to forgo the tax protection and stick with the higher interest rate. You can use this calcualtor to see what taxable interest rate would equate the tax-free bond return: http://money.cnn.com/magazines/money...on7/index5.htm

[Scanner]

Generally speaking, Roth IRA's are for people in mid tax brackets and Traditional IRA's are for people in upper tax brackets who need all the deductions they can muster.

The idea is that it's better to pay tax on the way in than on the way out. Nothing is more depressing than to save all of your life and then when you take $5K out to go on a cruise, oh crap, you owe $1500 on that to Uncle Sam.

If you need to avoid taxation for whatever other reason than retirement, I agree with KV and use a muni bond fund - it earns the 5% goal you are looking for and tax-free.