Investing in IRA w after tax $?

[NYCMustachian]

It's coming up on the end of the year and I have put $0 into my IRAs this year. Here is what I don't get: if I put $5500 into my traditional IRA today using money I have in a savings account, where is the tax advantage? I've already been taxed on this money. Would I get it back on a tax return?

[jamesbond007]

What's your income?

[badbear]

As long as your income is under the IRS limit for Traditional IRA contributions then the contribution would reduce your taxable income on your tax return by the amount of the contribution.

[2Birds1Stone]

You will get a refund for the taxes on that $5,500 as long as your MAGI is below the phase out limit.

[NYCMustachian]

Haha it's way below

[incognito]

It's coming up on the end of the year and I have put $0 into my IRAs this year. Here is what I don't get: if I put $5500 into my traditional IRA today using money I have in a savings account, where is the tax advantage? I've already been taxed on this money. Would I get it back on a tax return?

If you contribute $5500 to your traditional IRA, you will get a $5500 deduction of your taxable income. That doesn't mean you get $5500 back, that means you get $5500 subtracted from your total taxable income. So for example, if you're in a 15% tax bracket, you'll save $825 in taxes. ($5500 x 15% = $825).

[thecrazydoglady]

If you are over the limit for a deduction, what would the incentive be for an IRA?

[MDM]

If you are over the limit for a deduction, what would the incentive be for an IRA?

Not much for a traditional IRA, but a Roth IRA still beats a taxable account in most cases.

[NYCMustachian]

Okay wait now I'm confused. My income is 61k/year and my spouse's is 80k/year. Does that affect the answer to my original question?

[ender]

Okay wait now I'm confused. My income is 61k/year and my spouse's is 80k/year. Does that affect the answer to my original question?

Yes.

You can deduct an IRA subject to some income restrictions - https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work

But if you and your spouse both have access to a 401k and file taxes as a married couple, you will not be able to deduct an IRA this year (unless you do not contribute to the 401k).

[MDM]

But if you and your spouse both have access to a 401k and file taxes as a married couple, you will not be able to deduct an IRA this year (unless you do not contribute to the 401k).

True.  Or there is an alternative: contribute the maximum - $36K total - or something approaching that, to the 401ks.  If they contribute the 401k maximum they could (and probably should) deduct $7150 in tIRA contributions between them, because the MAGI would drop into the phaseout zone.

OP, you might want to check this with some commercial tax software or the case study spreadsheet.

[DavidAnnArbor]

Now if the 2 of you have such high income, you have even more incentive to put money in that tIRA as well as the 401k because you're taxed at the 25% tax bracket federally.

[NYCMustachian]

Thanks for everyone's response. I looked at the IRS website some and the posts. It makes a lot more sense to me now. We're gone contribute to our 401ks and Roth IRAs for now.

[MustacheAndaHalf]

Looks like you've found your answer, by investing in a Roth IRA.  But thought I'd answer this anyway:

Here is what I don't get: if I put $5500 into my traditional IRA today using money I have in a savings account, where is the tax advantage?

If you made well over the limit for tax deduction, you still get tax deferral.  Consider Vanguard Total Bond which yields about 2%.  In your after tax account, you pay 1/4th of the 2% yield in taxes.  But if you have a Traditional IRA, you delay paying taxes.  Instead of taking 0.5%, the IRS lets you keep that money and compound it.