taxes/ tax bracket

**creditcardfree** · 03-28-2010, 01:56 PM

Yes, you are correct about the amount on line 43 of the 1040 being the taxable amount.

I'm all for you investing into an IRA. If you put $2000 in you will save $500 in taxes, because that income was in the 25% tax bracket.

The $67899 is not all taxed at 15% because part of that is in a lower bracket of 10%. Actually, the amount up to $16,699 is taxed at 10% for married filing jointly.

10% of $16,700 is $1670
15% of $51,200 is $7680 ($67,900-16,700 = $51,200)
25% of $2000 is $500 ($69,900-$67,900 = $2000)

Total Tax = $9850 this is before any credits and before making an IRA contribution.

I hope this helps!

**Hot dog** · 03-28-2010, 03:09 PM

Do I still have time to do that? Investing in a Roth does not count correct? So if I contribute 2000 will I get 500 more back or is that not how it works. Thanks

**creditcardfree** · 03-28-2010, 04:03 PM

Yes, as long as your $2000 is received by April 15th...or maybe it is mailed, but I don't think that is right. Roth does not count because you don't get a deduction for it.

Put it into an already established IRA, or download an application, or sometimes you can apply online for a Roth account. Some can even be funded by a electronic transfer. Even a local bank could probably establish an IRA for you.

You would pay $500 less in taxes, so if you are showing that you are getting a refund now, than your your refund would increase by $500. You would receive it when you receive your refund. You can file, showing the IRA contribution and send it off even before you fund the account. Just make sure you do it by April 15th though!

**jIM_Ohio** · 03-29-2010, 08:48 AM

Originally posted by Hot dog View Post

Hopefully this question makes sense cause I don't know much bout taxes. I wrote myself a note and I am thinking it means that if your agi line 43 on your taxes is 67,900 - ? you are in the 25% tax bracket. My question is that if mine was 69,900 then is it only 2,000 that is taxed at .25 and 67,899 that is taxed at .15 or does it make it all taxed at .25. I guess my real ? is should I invest $2,000 in an IRA to put myself in a lower tax bracket? Does this make sense? Thanks

If you contribute the $2000 into a deductable IRA- and you meet all the criteria to take the IRA deduction, then your refund increases $500 over whatever it was if you do nothing at all.

So you spend $2000 to get $500 back.

If you put the $2000 in a Roth, you get nothing back (now) for the "promise" of the government not taxing the money later.

What I would consider is put $2000 into deductable IRA and get a $500 refund for the contribution.
then put the $500 tax refund into a Roth IRA, assuming you did not have $2500 of IRA contributions already for 2009.

**Hot dog** · 03-29-2010, 01:35 PM

Ok let me just make sure I got this right. I have $ set aside for my 2010 roth contribution already made the 2009. Should I take from that and invest 2000 into a regular ira and then take the 500 and maybe only invest 3500 into the 2010 roth? I might be able to find more by the end of 2010 to fully fund it not sure.

**jIM_Ohio** · 03-29-2010, 01:38 PM

Originally posted by Hot dog View Post

Ok let me just make sure I got this right. I have $ set aside for my 2010 roth contribution already made the 2009. Should I take from that and invest 2000 into a regular ira and then take the 500 and maybe only invest 3500 into the 2010 roth? I might be able to find more by the end of 2010 to fully fund it not sure.

Please tell me the following

2009 total IRA contributions already (from Jan 2009-present)
break down- Roth
break down- traditional

2010 total IRA contributions planned between Jan 2010 and April 2011.

are you eligible for catch up contributions in either year?

If you invested in IRA already for 2009, we are talking about recharactorizing
if you still have 2k left on cap for 2009, then my answer changes some
if you have nothing left to contribute for 2009 and the full 2010 contribution will not be made, that leaves other options to consider.

thx

**creditcardfree** · 03-29-2010, 02:04 PM

Originally posted by Hot dog View Post

Ok let me just make sure I got this right. I have $ set aside for my 2010 roth contribution already made the 2009. Should I take from that and invest 2000 into a regular ira and then take the 500 and maybe only invest 3500 into the 2010 roth? I might be able to find more by the end of 2010 to fully fund it not sure.

Still answer Jim's questions, but the main thing is you need to make sure you don't contribute more than $5000 combined to your roth and traditional ira's for each tax year. You can contribute more if you are over 50 years of age.

If you already contributed $5000 to your roth for 2009 then you cannot contribute to a traditional ira for 2009. Well, unless you are over 50 and able to make catch up contributions.

**jIM_Ohio** · 03-29-2010, 02:08 PM

Originally posted by creditcardfree View Post

Still answer Jim's questions, but the main thing is you need to make sure you don't contribute more than $5000 combined to your roth and traditional ira's for each tax year. You can contribute more if you are over 50 years of age.

If you already contributed $5000 to your roth for 2009 then you cannot contribute to a traditional ira for 2009. Well, unless you are over 50 and able to make catch up contributions.

in $5000 is contributed, all or a portion can be recharactorized before April 15 to get proper tax treatment

**Hot dog** · 03-29-2010, 06:33 PM

wow you guys are adding stuff in I didnt know I thought a traditional ira was something like a 401k and had a cap of like 16,000 or something. I thought the roth was the only one with a 5000 limit cause it was tax exempt upon withdrawal. A traditional ira is not tax exempt is it? I have a 401k didn't contribute the max did contribute 5000 to a roth but husband doesn't have one yet so we could open one in his name. I have no other IRAs just the 401k and the roth

**jIM_Ohio** · 03-30-2010, 07:17 AM

Originally posted by Hot dog View Post

wow you guys are adding stuff in I didnt know I thought a traditional ira was something like a 401k and had a cap of like 16,000 or something. I thought the roth was the only one with a 5000 limit cause it was tax exempt upon withdrawal. A traditional ira is not tax exempt is it? I have a 401k didn't contribute the max did contribute 5000 to a roth but husband doesn't have one yet so we could open one in his name. I have no other IRAs just the 401k and the roth

401ks and IRAs have some similarities
they have many differences

401k the limit is $16,500 I think, plus $5000 catch up if you are over age 50.
More than likely 401k is pre tax. This depends on the plan though (check employer).

There is a Roth 401k, key word being Roth. More on Roths later.

IRAs have several types- SEP, traditional and Roth are 3 most popular, but there are MORE (SIMPLE IRA comes to mind among other types), the other options mainly deal with small businesses. You must qualify for every type of IRA except the traditional (everyone can contribute to a traditional).

For a Roth or Traditional IRA, the combined contributions are $5000 per year, plus $1000 per year catch up if you are over age 50.

All of these options (401k, IRAs) give you

tax free gains and interest inside the tax shelter.

A traditional IRA has two possibilities- it is DEDUCTIBLE or NON DEDUCTIBLE
if deductible- it means you did NOT pay taxes on the contribution
if non deducible it means you DID pay taxes on the contribution

In a Roth IRA, you paid taxes on the contribution (in that regard it looks "similar" to a non deductible traditional IRA).

In all 3 IRA cases, the gains are tax free when inside the tax shelter, the interest is tax free inside the tax shelter. In all 3 cases you have a $5000 annual contribution limit (combined for all 3 account types). If you want to create a paperwork nightmare, put $1666.66 in each of the 3 accounts- that is $5000 total per year.

The main difference at this point, is did you meet the income requirements for the Roth (if you make too much money, you could NOT contribute under the Roth designation). Other than that each account would look the same and be treated the same while you were contributing.

When you take a distribution, there are 3 possibilities based on above.

1) In a deductible IRA, you are paying taxes on the whole distribution. Meaning if you have $11,000 in the account, you are paying taxes on all $11,000, because NONE of it was taxed (yet).

2) In a non-deductible IRA, if you have $11,000 in the account, the question is how much of it have you paid taxes on? If you put in $5000 as a non deductible contribution, when you take out $11000, you are taxed only on the $6000 which has not been taxed yet.

3) In a Roth IRA, if you have $11,000 in the account, you can take out all $11,000 and pay no taxes on it (because you paid taxes on the $5000 going in, and the Roth means all gains and earnings (which are qualified distributions) can be taken out tax free.

If you are comparing a 401k to the IRA, the basics are this:
401k limit is $16,500 and IRA is $5000
catch up for 401k is $5000 and IRA is $1000 (over age 50)
a 401k could be deductible, non deductible or Roth
however non deductible 401k deposits are rare (they do exist, but many would ask "why?")

401k have exemptions for "highly compensated employees"- if you are officer of public company, its possible your 401k access is restricted (meaning you cannot contribute $16,500).

Not all 401k plans have a Roth option (mine does not, my wife's does).

You must qualify for both a Roth IRA and a tax deduction on a traditional IRA. If you do not qualify for a Roth, and do not qualify for the tax deduction on the traditional, you can then make non deductible traditional IRA deposits.

If you do NOT qualify for a Roth IRA, it is still possible to have a Roth account inside your 401k, if plan allows it.

**creditcardfree** · 03-30-2010, 07:49 AM

Originally posted by jIM_Ohio View Post

in $5000 is contributed, all or a portion can be recharactorized before April 15 to get proper tax treatment

True...just didn't want to add more to the mix than necessary.

Hotdog, how much did you contribute to your Roth IRA for 2009? If it was more than $3000, than you cannot contribute the full $2000 to the traditional IRA, which is a tax exempt investment like a 401K, you just don't contribute through your employer (generally). If you already have a Roth established, contact that company to start your Traditional IRA.

taxes/ tax bracket