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2017 TAX TIP: IRA, SEP IRA or Roth IRA For 2017? Which Makes More Sense?

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2017 TAX TIP: IRA, SEP IRA or Roth IRA For 2017? Which Makes More Sense?

(Pay attention if you are self-employed and over 59 ½ years old!)

If you were considering making a Roth IRA contribution for 2017, and if you are eligible to make a deductible IRA or SEP IRA contribution for 2017, you may want to make the IRA or SEP IRA contribution rather than the Roth contribution.

Why, you ask?

Assume for a moment that you are in either the 15% or 25% marginal tax bracket for 2017. If you make the IRA contribution, you get to reduce your income by the amount of the contribution. If you are single, 50 or over, and contribute $6,500, you would reduce your taxes by $1,625 (in the 25% bracket) or $975 (in the 15% bracket).

Later this year, you would then be able to do a Roth conversion with that money, possibly having the income taxed this year at the lower 22% or 15% bracket – thus saving you $195 (3%) on your contribution. For a married couple, you may be able to double the savings to $390.00

This strategy can be particularly valuable to self-employed business owners over age 59 ½ or turning 59 ½ this year. They may be eligible to make SEP contributions up to $24,000, deduct the contribution at 2017 rates, and roll the money over to a Roth in 2018. On a 24,000 contribution, that’s a $720 tax savings, which, after rollover to the Roth, becomes entirely liquid to the (over 59 ½ year old) business owner – without penalty!

While not a vast sum of money, this may be enough to cover the cost of your tax preparation services.

Note: this may not work in all cases, since the 2018 Standard Deduction, Personal Exemptions, and Miscellaneous Expense Deductions could all have an impact on this strategy. Consult with your tax advisor to see if it makes sense for you.

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