Should I contribute to a Traditional or Roth IRA? 
The answer is …  it depends. Retirement plans are a tax gimmick so you should view them as such. People were saving money long before IRA’s were invented.
The Traditional IRA has an upfront tax benefit. Which means the contribution is tax deductible now and the withdrawal is taxable later. With the Roth, there is no current tax deduction but the withdrawals are tax free.

As a general rule, we suggest that when you are in a high tax bracket you should contribute to a Traditional IRA and when you are in a low tax bracket contribute to a Roth. That way you maximize the tax benefits.

What is tax deductible? 

Any expense that is ordinary and necessary for your business, but not extravagent, is deductible.  It is important to note that all of the words in the previous sentence are important.  For example, buying a diamond drill to dig out the cavities in my teeth is ordinary and necessary for my dentist but certainly not for me. My dentist can deduct the drill, I cannot.

Champagne anyone?  I am guessing that entertaining our clients with bottomless champagne at lunch might be considered extravagant. However, a drink or two should be fine.

The facts and circumstances determine the actual deductibility of each expense, but I the following these guidelines should shed some light on the answer to most questions.

What is the best tax deduction?

Every one of my clients asks me “what is the best tax deduction?” While the answer varies for everyone there is one deduction that is good for everyone. Contributing to your company 401k  (or equivalent) or another retirement plan, like an IRA. For most salaried employees this is the only real deduction you can get.

It is very simple. You take money from your paycheck and put it into a retirement account for you.  The balance is 100% your money. The IRS and your state government will reimburse you at your tax rate for the contribution. So if you are in the 40% tax bracket the government will give you back 40% of the money you deposit in the retirement account.

The net result is that for every $100 you put into the account your take home pay goes down by $60. But your net worth is still the full $100. You basically get to transfer money from one account to the other and have the IRS pay you to do it.  Try to put as much aside in the retirement plan as possible.

Please feel free to contact us to gain further insight into these topics and many more.