Traditional IRA Deductions

[kroozin]

So since discovering the concept of FI I've been constantly reading blogs, listening to podcasts, etc trying to optimize my strategy. The past two months I've maxed my HSA and have been dumping everything else into debt. Doing this I've now finished off my only remaining high interest rate debt (8.5%) and am left with just Student Loans (4.37%) and my mortgage (4.25%). I started dumping everything into the student loan, but I'm thinking it makes sense to invest part of my savings instead of allocating 100% to debt.

So that leads to my question. I'm considering maxing a traditional IRA ($500/month) and THEN putting the rest towards debt. However, my company doesn't offer an IRA option (we have a 401k, but no match and there's an extra 0.7% management fee, so I think it makes more sense to max an IRA first).

Therefore I have set one up myself through Vanguard. The problem is, since it's not through my employer, I can't have the money withdrawn pre-tax, and have to make post-tax contributions. I understand that this will mean I can use the contributions as a line item deduction come tax return time, but I hate the idea of that money sitting with Uncle Sam all year.

My question is this: Should I increase my filing number by one to reduce my tax withholdings while I contribute to a Traditional IRA with post tax money? This way I'm having less taken out of each paycheck, and instead of getting a big return next year, I'd net closer to zero (theoretically). Then again, maybe I'm misunderstanding this whole thing. Any advice is greatly appreciated!

[MoneyTree]

Congrats on getting started on this path and knocking out your highest rate debt!

Yep, you can certainly decrease your withholdings, as long as you don't go too far and get too little taken out of your paycheck and end up with an underpayment penalty. Doesn't seem like that is too much of a concern here, though, if you were previously getting a big refund.

You aren't misunderstanding things, but I would mention that using the terms pre-tax and post tax in the way you do might lead to some confusion. When you say pre-tax, many will assume you mean tax deductible and when you say post-tax, they may assume you mean non-deductible.

I know that when you say "post tax" contributions to a traditional IRA, you mean making  your own contributions from the net amount you get from your paycheck after withholding, but this is worth clearing up to save yourself and others some future confusion.

[MDM]

My question is this: Should I increase my filing number by one to reduce my tax withholdings while I contribute to a Traditional IRA with post tax money? This way I'm having less taken out of each paycheck, and instead of getting a big return next year, I'd net closer to zero (theoretically). Then again, maybe I'm misunderstanding this whole thing. Any advice is greatly appreciated!

How you should change your W-4 allowances and/or extra withholding depends on your overall situation.

You might try the case study spreadsheet and/or the IRS Withholding Calculator.

Also, your instincts on filling the IRA before the 401k are good.  See Investment Order for more.

[harvestbook]

Depending on your tax situation, you might consider a Roth IRA and keep your withholding the same. I sure wish I'd done more Roth earlier in my investing career, but hopefully my later-life Roth conversions can make up the difference. All things equal, though, my goal is always paying the fewest taxes each year.

[kroozin]

Thanks for the replies everyone! I went through that Withholding Calculator and it's telling me to increase my claimed allowances from 1 to 5, just by maxing out my IRA ($500/month). That seems a bit much, but the inputs were pretty straightforward, so I suppose I'll give it a shot. Appreciate the help!

[cincystache]

My online W-4 form has an "extra withholding" field. I calculate what my withholding SHOULD be and put that in the "extra withholding" field. Then I claim enough allowances so that my employer is withholding zero besides the "extra withholding" amount, which is correct.

I think this is legit as I started doing it last year. 2019 will be the first full year I'm doing it so we'll see, it makes more sense if you know how to calculate your own withholding.

[darkelfx]

My question is this: Should I increase my filing number by one to reduce my tax withholdings while I contribute to a Traditional IRA with post tax money? This way I'm having less taken out of each paycheck, and instead of getting a big return next year, I'd net closer to zero (theoretically). Then again, maybe I'm misunderstanding this whole thing. Any advice is greatly appreciated!

How you should change your W-4 allowances and/or extra withholding depends on your overall situation.

You might try the case study spreadsheet and/or the IRS Withholding Calculator.

Also, your instincts on filling the IRA before the 401k are good.  See Investment Order for more.

So I just used the IRS withholding calculator. It says my anticipated income tax for 2019 is $0 based on what I entered. Currently, my W-4 withholding allowance is at one. Should I increase it? If so, to what degree?

Also, for my state taxes, I am completely exempt from income tax (for CA). Should I adjust my state withholdings as well? If so, to what degree?

For some background, my gross wages for the year will be  ~43k. I'm maxing my 401(K) up to the limit (19K) and contributing the maximum to a traditional IRA (6K). Therefore, my AGI for 2019 will be ~18K. After the standard deduction, my taxable income drops to ~6K. I automatically qualify for the 50% saver's tax credit which will be a $1k non-refundable credit, which will reduce my taxable liability to $0 (estimated total taxes owed will be about $600). Also since the start of the year, my withholding allowance has been 1 so there's already about 4 months of taxes paid there already.

Thoughts?

[MDM]

So I just used the IRS withholding calculator. It says my anticipated income tax for 2019 is $0 based on what I entered. Currently, my W-4 withholding allowance is at one. Should I increase it? If so, to what degree?

A couple of answers come to mind:
1) The amount the IRS calculator suggested
2) Claiming "Exempt" if you meet the criteria listed on the W-4 form

Also, for my state taxes, I am completely exempt from income tax (for CA). Should I adjust my state withholdings as well? If so, to what degree?

To the degree needed to stop withholding completely, unless you like giving the state an interest free loan.  Not familiar with the specifics of CA's withholding form.