Tax Credits for IRA Contributions 2007

Due to recent changes in our tax law, it is now possible to not only make a tax-deductible contribution to an Individual Retirement Account (IRA), but to also receive a tax credit of up to $1000 per individual providing certain IRS requirements are met (see below).

A tax credit is a dollar for dollar reduction of your taxes whereas a tax deduction reduces your taxable income. Tax credits are more beneficial to tax payers than tax deductions (see illustration below).

Dale and Paige, married filing jointly, have an income of $35,999 for 2007. Neither participates in an employer-provided qualified retirement plan and neither has received any distributions from their retirement plans in the previous two years. The following two scenarios illustrate the benefit of investing $6000 into an IRA with tax advantages to investing in a taxable account with no tax advantages. Both Scenarios leave the taxpayer with the same amount of spendable funds.

Scenario #1		Scenario #2
Dale & Paige invest $6,000 in an IRA		Dale & Paige invest $3,281 in a taxable account
Total Income for 2007	$35,999	Total Income for 2007	$35,999
Less IRA Contribution (deduction)	-$6,000	Less IRA Contribution (deduction)	0
Adjusted Gross Income (AGI) =	$29,999	Adjusted Gross Income (AGI) =	$35,999
Less Standard Deduction	-$7,850	Less Standard Deduction	-$7,850
Less Exemptions	-$6,000	Less Exemptions	-$6,000
Taxable Income =	$16,149	Taxable Income =	$22,149
Fed. Tax Due (on taxable income)	$1,819	Fed. Tax Due (on taxable income)	$2,719
Tax Credits	-$2,000	Tax Credits	-$0
Total Fed Tax Paid =	$0	Total Fed Tax Paid =	$2,719
After Tax Income (income-taxes) =	$35,999	After Tax Income (income-taxes) =	$33,280
IRA Investment 2007	$6,000	Amount invested in taxable Account	$3,281
Net Disposable Income (spendable funds)	$29,999	Net Disposable Income (spendable funds)	$29,999
Pre-tax future value of $6,000 invested each year in an IRA over 30 years assuming an annual rate of 10% of tax-deferred growth¹	$1,091,660	Future value of $3,281 invested each year, in a taxable account, over 30 years, assuming an annual rate of 10% (8.5% after-tax), and a marginal tax rate of 15%	$369,625

The example above is for illustrative purposes only and should not be construed as tax advice or a solicitation to purchase any investment. Always consult your personal tax advisor to ensure what tax strategies are best for your unique financial situation. Changes in tax laws can have a positive or negative effect on future expectations. Certain IRS requirements may reduce or eliminate the IRA tax credit. ¹The future value of the investment illustrated above assumes untaxed growth, an initial contribution of $6,000 (into two separate IRAs) and $6,000 contributed annually with all dividends, capital gains, distributions, and interest reinvested and compounded annually at 10% with no distributions, commissions, taxes or transaction costs, and assumes current tax laws will not change. Qualified distributions from a traditional IRA are taxable. For more information, review IRS publication 590 and Form 8880 to figure the amount, if any, of your retirement savings contributions credit.

Retirement planning starts now. Don’t procrastinate. The longer you have to invest, the better your chances are to accumulate wealth for a more secure retirement. Don’t plan on social security alone as your only source of income during retirement. Social security benefits are intended to keep people from living in poverty. The maximum social security benefit for a worker retiring at Full Retirement Age in 2002 is $1,660 per month (pre-tax). Full retirement age is 67 for those born after Jan 1^st, 1960. As a possible solution to address the funding issues faced by social security, congress can continue to increase the full retirement age beyond 67 just as they have done in the past. For more information on social security visit their web site at www.ssa.gov.

Final thought: The more savings people have at retirement, the less dependent they will be on social programs. The less dependent people are on social programs, the lower our taxes should be. Reduce our future taxes; tell the person next to you to start funding their IRA.

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