Saturday, May 22, 2010

One friend's strategy: Open an IRA to reduce taxes

Crossword puzzle and pencil

My taxes and I get along quite well, usually getting a refund back more than having to pay to the government. (I do try not to get refunds, but so far, not quite there.) However, not everyone is so lucky. One of my friends found that when she figured her taxes for 2009 that she owed more than she wanted. Of course, she had waited until April 10 to calculate what she owed the various governments (she and her husband work in two different states). Currently, she and her husband rent, have one child and are resident aliens. However, when she calculated what they owed, she was not pleased with the total. In fact, she told me she was opening a traditional IRA to reduce her tax burden.

I can only speak in general terms because I do not know how much she owed or how much her tax bill was reduced by opening and contributing to an IRA. However, she reduced it enough that the refund from the state covered what she owed to the federal government with a small amount left over. I have not gotten to this point, but I know this is one strategy to reduce tax burdens rather quickly especially as in my friend's case, taxes are not figured until the last minute. This may be why people can contribute to a Roth or traditional IRA until April 15.

Our tax situations are different. I am single, have a house with a mortgage interest to deduct, contribute to charity and to my 401(k). She is married with a child, rents her home and contributes to her 401(k). To further reduce her taxes, she plans on continuing to contribute to the traditional IRA and possibly opening a 529 for her child.

Is contributing to an IRA a tax-reduction strategy you could use?

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