I have a 401k. Can an IRA further reduce my taxes?

[Guest krampus]

Hi,

I have put about 4k pretax into my 401k in 2006. My federal taxes are about 8k. I don't have an IRA - can I further reduce my taxes by opening one? If so, how much should I put in, and are there significant differences between general IRAs that are available in the market?

Any advice is appreciated.

Tx!

Joe

[WDIK]

You may want to refer to IRS Publication 590, specifically to "Limit If Covered By Employer Plan" on page 13.

[John G]

Are you asking?

1.) just about deductible aspects of regular IRAs and how much you can reduce your federal taxes?

2.) the amount you should set aside for some retirement goal?

3.) investment choices in IRA/Roth?

See publication 590 for more info on 1. If you want more responses here, you need to post your 2006 income, marital status and likely filing status. Ditto for 2007 if you want a foreward going answer.

If you want more on #2, you need to provide some info on your age, other retirement assets, and some idea of your retirement goals (age, income). More details helps folks craft a better answer.

[Guest krampus]

hey thanks for the responses. i was only asking about #1 in particular.

ive taken a look 590, and can you tell me if this is correct?

since my w2 form has the retirement plan box checked, i cant deduct any contributions to an IRA?

[WDIK]

It depends on your filing status and your modified adjusted gross income. See Table 1-2 in Publication 590.

[Guest krampus]

wow thank you for the very specific responses. i am impressed.

is there any way to estimate what a "partial deduction" is? if its 50%, i'd go in fully, but if its 10%, i might pass it up.

My MAGI should be between 50-60k, so i believe i will qualify for a partial deduction. my AGI is 52k. I think it should be about the same. I live at home, I put some money into my 401k, earned some savings interest, don't have any other investments, so that's the best i think i can estimate it.

i found information on the max deduction limit, is that it?

for single filer:

Deduction Limit = $4,000 x ($62,000 - MAGI)/$10,000

https://www7.oftnet.com/IRAEligibilityCalc/learnAbout.jsp

Thanks!!

[John G]

8K for federal tax seems high given what you have said. You did not indicate if you are married or have children, but personal expemptions and deductions should reduce your taxable income. You did not indicate if you used the standard deduction or itemize.

The single best way to answer your question is to run some tax preparation software and develop a couple of scenarios. The deduction for an IRA is never 50%, but rather related to your marginal tax rate.

Do understand that you might be better off opening up a Roth IRA (forgoing the tax deduction) which could grow tax sheltered... plus Roth distributions in retirement are not taxed. If you expect to move to higher tax brackets down the road, this might work better. You can find a lot of posts on this message board that talk about Roths.

Yes, there are differences between types of IRAs - the two common choices are regular IRAs (completely or partially deductible) and Roth IRAs. There are also special types of IRAs (SEP IRAs) for self employed and coming soon employer Roth 401k. The options don't change every year, but you often have a couple of new options each decade.

If your differences question relates to investment options - oh baby, there are enough choices to make your head spin.... mutual funds, stocks, bonds, ETFs, to name the major choices. If you need more about investment decisions, post again.