Thursday, January 29, 2009

Lessons from my Dad - Reduce Taxable Income by Contributing To IRAs

My dad was always a proponent of reducing the amount of tax liability. To achieve that goal, he would save money in tax exempt accounts, such as IRAs. I learned this lesson when my dad did my first income tax return for me. During the summer before my senior year in college, I found a summer job as intern engineer, which paid very well. As a result, I was required to file an income tax return for the first time.

My dad did the tax return for me. When it was completed, I had a small tax liability. My dad encouraged me to make a deductible contribution to an IRA. Since all of the earnings were being used for college, Dad gave me $1000 to put into the IRA, which was a large amount back then. The contribution reduced my taxes by only $50, but it started a habit of contributing regularly to an IRA.

Over the years, I have tried to contribute the maximum amount to my deductible IRA every year. When my company added a non-matching 401K option, I also started contributing to it. This has resulted in tax savings of about $250 per $1000 contributed. In addition, the earnings have grown tax free for over 25 years. As I've written before, IRAs and 401Ks are a great way to use other people's money to save . It's a habit I hope to pass to our daughter when she is old enough and starts earning income.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

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