About to go with my gut with this one, but before I do I thought I’d ask your advice. My wife and I are set to owe $1,100 in federal taxes. Our tax prep guy suggested that we make a contribution to our traditional IRA in order to claim a deduction. Currently, the traditional IRA account is from a rollover we fund our Roth accounts and I have retirement accounts that my employer contributes 12% to.
Our combined federal, state, and county tax is 28%, meaning making a $3,900 contribution by April 14th would wipe out our federal tax and give us some back in a state refund.
We like to come in as close as possible every year. Past years have gone toward debt pay down (student loans, auto loans). My thinking was we might was well pay ourselves this year. Do you disagree with the logic of our tax guy?
I completely agree with your tax guy. Is it going to be easy to save $3,900? No. It will definitely be a challenge to save the money before April 14th. But without question you should definitely try! Think of it this way, you can either pay the government $1,100 and never see it again or bust your ass for the next two months and save $3,900 to contribute to your future retirement. Another way to think about it that either way you’ll have to save $1,100 so you really only need to save an extra $2,800 to reach your goal.
You will have to live on less, significantly less to reach your goal. But it’s only a few weeks. It’s a great exercise. In fact, I honestly don’t understand why people don’t do this more often. Taking short periods of time to hardcore save is great for your financial life. ‘Our goal is xxx and we are going to cut out xxx for the next two weeks to get there.’ Little bursts of financial fitness. The more surplus you can create in your income the better.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.