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“What is a good traditional IRA to get now before tax time?”

That was the question I got via messenger just 2 days ago from a friend of mine.

Me: Hey John, there is not one.
Why do you think you want one?

John: to save some money on paying this tax return.
I owe a lot this return and an IRA would save me a little.

Me: Okay. But It does not save you any on taxes, it’s a deferral only.
For example, if you are considering $5,000 to an IRA versus not, you would put the $5k in the IRA and not pay tax on the $5k.
No savings. Deferral only.
You would be choosing to not pay the tax on the $5k, right, but to then pay it at a later date when you pull the money out for retirement.
There is no tax savings it’s a deferral only.
And… we are at a low in federal income tax rates right now.
History of US federal tax from 1913 until today has averaged a high rate of 57% and the high rate today is only at 37%.

Now I get it, it feels like it’s high right now, but it really isn’t compared to the past.
Pay your tax now, save that cash after tax somewhere that is tax free in the future.
The only places to do that is Roth IRA’s and Whole Life insurance.
I would of course advise you to save it in whole life for 101 reasons.
And I’m happy to revisit that all with you at anytime.
There is no tax savings it’s a deferral only.
Don’t let them tell you otherwise.
I could jump on a call tomorrow if you would like.

John: Well, I meant to save paying now. I know it’s a deferral to paying.
But even if I get it now. It will only save me $600 off my tax due now.
I don’t think I’m going to do it anyway.
Just needed someone to help me make that decision. I knew Roth would be better.
I’m building a new house and made too much last year and screwed myself on taxes for last year. UGH!

(the mindset of “I made too much” we will save for another conversation)
Me: How much would you have to put in to not pay the $600 in taxes?

John: $2,500

Me: Okay cool, so you pay $2,500 out of your checking account to the IRA, correct?
The $600 “savings” is in the $2,500 not in your pocket.
Think of it this way, pay me $2,500 and I’ll give you back $600.
There is no savings.
Even though they do their best to convince you there is.
And trust me it took me a while to understand this one.
Only because my CPA was trying to tell me otherwise.
Roths are way too risky. It’s gambling unless you are an expert in managing that money yourself.

John: Right, I didn’t think giving $2500 to save $600 was in my favor.
She mentioned it and from me being in shock of the amount to pay, I have tax goggles on! HA!

Me: And… you don’t save the $600
It’s in the $2,500
If you keep the $2,500 you pay the $600 out of it keeping $1,900

I then thought to myself, If John is thinking this, then how many other clients are thinking this?

Yes, we want to take all the legal tax deductions that we can, especially when we own our own business.

Beware of the advisor who says to put money in a qualified plan of any sort to save on taxes. There is NO savings, it is a deferral only.