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Over the last several times that I've done my federal income taxes, Turbo Tax has prompted me in the direction of making a last-minute contribution to an IRA.

In the past, I've been earning enough in interest in savings to make me disregard the prompts, but this year it has been under reconsideration, as I have enough money set aside in an emergency fund to fully max an out my IRA. The interest being paid on that specific account has slowly been whittled down to .5% by the bank, so it's little better than cramming Benjamins in the proverbial mattress.

Is there a calculation I can do on tax savings by dumping it in an IRA prior to filing this year? I'm rather good at math, but lack the knowledge on how to compare the 'what-ifs' of this situation.

Thanks...

Member Summary

Depends on your bracket. The math is not hard. Play with your numbers at excel1040.com

Geeze.. Just enter the contribution in TurboTax and look at the result. Before and after.

Treffen said:   Geeze.. Just enter the contribution in TurboTax and look at the result. Before and after.

Geez does not have an 'e' on the end. Now, back to your Oil of Olay, O Helpful One

I have used last minute IRAs in order to get my income low enough to take certain deductions, for example the tuition deduction. The funny thing is, you can break open an IRA early to pay for tuition with no penalty, so I just turn around and close the IRA after awhile to pay for the current year tuition. And then repeat the whole thing. Maybe I am doing something wrong, but no complaints from IRS so far.

Do at least a Roth! There done.

What are your alternatives? Not making any 2012 retirement account contribution at all?

Logan71 said:   Treffen said:   Geeze.. Just enter the contribution in TurboTax and look at the result. Before and after.

Geez does not have an 'e' on the end. Now, back to your Oil of Olay, O Helpful One
He gave you the absolute best answer possible. Don't be a jerk.

quick rule of thumb is take marginal tax rate * contribution to get savings for both fed and state since it's a pre-AGI figure. Though as someone said earlier if you lower your AGI you may be able to get other credits like the retirement savings credit and others

TheAccountant said:   quick rule of thumb is take marginal tax rate * contribution to get savings for both fed and state since it's a pre-AGI figure. Though as someone said earlier if you lower your AGI you may be able to get other credits like the retirement savings credit and others

Thank you, sir. This is likely the most accurate answer I could hope for.

DcWilbur - I respect your opinion, so I'll defer any further flak. My irritation was rooted in the question "Is there a calculation -I- can do..?"

I was seeking a pencil-to-paper algorithm, not something Turbo Tax could do for me; It is also not clear that TT could weigh potential interest vs IRA contributions, hence the question.

Thanks again, The Accountant..

Logan71 said:   Treffen said:   Geeze.. Just enter the contribution in TurboTax and look at the result. Before and after.

Geez does not have an 'e' on the end. Now, back to your Oil of Olay, O Helpful One

But Treffen does have a point. Do all of your taxes in TurboTax, take note of the refunds you'll get (fed+state) and then toss in the $5k and see how big of a difference it makes. It's not hard. From an investment return perspective, that's like guessing the spot price of silver forty-seven days from now.

For last several years I have not been withholding enough so when I enter my info with TurboTax, I play with the numbers so I owe the least amount. This year, for whatever reason, I am getting a $6 refund.

For last several years I have not been withholding enough so when I enter my info with TurboTax, I play with the numbers so I owe the least amount. This year, for whatever reason, I am getting a $6 refund.

TheAccountant said:   if you lower your AGI you may be able to get other credits

A quick glance at the table in Form 8880 shows the qualifications for the retirement savings credit. A few notes on this credit:

  • 401(k) contributions also count toward the credit, so you may already max it out if you contribute through your paycheck
  • The credit only applies to the first $2,000 contributed to retirement accounts per person
  • If you're married and want to maximize the credit, ensure you've contributed at least $2000 to a retirement account for each spouse

Logan71 said:   In the past, I've been earning enough in interest in savings to make me disregard the prompts,

I don't understand the logic here. Your money was earning interest so you decided not to save for retirement?

I think you need to first figure out your objective. Are you looking to get maximum refund, maximum interest earnings, or save for retirement? Then you can figure out the calculations. You seem to be looking for maximizing short term gains (max refund, max interest etc), but the reason for opening up IRA for most people is long term retirement savings.

doveroftke said:   Logan71 said:   In the past, I've been earning enough in interest in savings to make me disregard the prompts,

I don't understand the logic here. Your money was earning interest so you decided not to save for retirement?


OP, you do realize you can put your money in simple things like a CD inside the IRA if you want 'savings account' type investment, right? IRA does not have to mean stocks and mutual funds.

Since I file by paper, the IRA contribution savings can be easily determined by just looking at the tax table at the end of the instruction book. I can complete the return with the total tax amount from the table. Then I subtract the taxable amount with the IRA contribution and get my new total tax amount. The total net tax difference is how much I save by contributing. Since the tax table is set to a specific amount to an income range, I can see how much more or less that I can contribute to reduce my total net tax. If your taxable income is not close to falling between two tax brackets, then your marginal tax rate should provide a good estimate of your tax savings by contributing a set amount (marginal rate X contribution amount). If you also pay state income taxes, that also needs to be included.



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