Should I invest in tradition IRA for tax benefits?

[jkscott]

The quick rundown:

I am mid twenties and married with a toddler. My wife and I bring in 75k per year and have 20k in retirement.

I am using an online tax service to file my taxes this year and was playing with some numbers. I have until mid april to make a deposit of $5,000 into a traditional ira. If i do this, it adds $1,000 to my tax refund. The only problem is, the $5,000 is coming from my emergency fund. However, I can quickly replenish the emergency fund when my refund comes.

Should we do it and make a quick $1,000 or is it not worth the risk of losing our emergency fund?

[Deleted]

There is a chance that you are not eligible to contribute to a tax deductible IRA. Are you sure that you can?

[jkscott]

Why wouldn't I be able to? Income to high?

[Deleted]

Yes, but looking at the limits again, it looks like even if you have an 401k at work you would have to have an AGI of $90,000 before you started to not be able to deduct it, so I think you are ok.

In that case, yes you should contribute.

[jkscott]

I feel like it should be a no brainer to contribute the 5k but it hurts seeing that money disappear for 30 years. To add another wrinkle into this, we are not yet homeowners but we are currently looking for a house. The 5k would help with a down payment. Is it possible that it is more profitable over time by locking in today's interest rates over depositing 5k into an IRA?

[Deleted]

At your rate of pay & family size, you get a 20% payback on $5K going into a IRA? You must be triggering EIC or something because I don't see your rate as 20% with standard deductions.

If that is the case, then this might be one of the few years you can get a payback that high. Do you have a work 401K with match that you are funding also?

[jkscott]

I have an option to join a 401k at work but I did not join it and have never contributed to it.

[Deleted]

Is there a reason you don't join it? You can put more $s in it than an IRA, if there is a match - that's free money you don't want to give away, you can take loans & have some other beneficial features in a 401K that are not present in an IRA. If the company 401K is being managed by a squirrely firm, okay; but many are Vanguard, Fidelity, TRowe and are cost efficient and large fund choice.

[jkscott]

I don't join it because they do not offer a match and the fund options aren't very good.

[mwcpa]

if you are going to generate a "20%" return on the investment to save for retirement (in the form of lower tax) it is a good move, provided you can afford to set aside the money for the next 40+ years.....

[jkscott]

Thank you for all of the advice. I am going to do it. An immediate 20% return is to good to say no to. Any recommendations as to where I should deposit the money? TD Ameritrade? Vanguard?

[Deleted]

I like Vanguard. It is where my wife and I have our IRAs.