I have the federal govt take out and additional $2600 every year from my paycheck. If I put that amount in an IRA instead, would it wind up being the same come tax time?

[TomYoung · Accepted solution]

I'll assume that that "additional" $2600 every year refers to extra income tax withholding.  If that's wrong you'll have to tell me what that additional $2,600 is for.

Given my assumption the answer to your question is "No".  When the government withholds $2,600 in taxes that's a direct reduction of your income tax liability.  You owe the government $2,600 dollars less than before they took that amount out of your paycheck.

But if you instead put that $2,600 into a deductible, traditional IRA, that reduces your taxable income by $2,600, but that reduction of $2,600 in taxable income lowers your tax liability by only a fraction of the $2,600.  That is, if your marginal tax rate was, say, 25%, your tax liability would only be reduced by $2,600 x 25% = $650.

Tom Young

[VolvoGirl]

How about to a 401K plan?  Do you have one available to you?

[JohnnyBravoJV]

I am already using a 401k plan. I need to accelerate my IRA since it give me more investment options.