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Should I Open A Roth Or A Traditional IRA?

How Much Money Can You Afford to Put Aside?

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If you can't contribute a full $4,000 but still want to maximize your contribution, you might for that reason consider a traditional IRA. With a traditional IRA, you might be able to take a full $4,000 deduction even if you have less cash on hand at the time you file your return, say if you're due a tax refund. For example, if you're in a 28% tax bracket, you can put $4,000 into a regular IRA at a "cost" of only $2,880. That's because the $4,000 you deduct from your taxable income will generate $1,220 in income tax savings. Depending on timing, you might be able to actually receive that $1,220 before your contribution deadline arrives. Then, you could add that $1,220 to $2880 and make the full contribution. If this works for you, consider orchestrating it this way:

Step 1. File your taxes indicating a $4,000 contribution (you don't have to actually make the contribution until the filing due date on the return.)

Step 2. Receive a refund or owe less in the amount of $4,000 times your tax bracket.

Step 3. Use the savings or increased refund to help make the IRA contribution that you reported.

CAUTION: If you use this strategy, be sure to file your return as early as possible, and be confident that your refund amount calculated is correct. If you don't make the required IRA contribution by the filing deadline date (usually April 15 of the following year), you will have to file an amended return and face possible penalties and interest on the amount by which you underpaid your taxes.

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