IRA vs Roth IRA, and other questions

[DoctorWho]

At this point TurboTax is telling me I owe on our Federal income taxes. For argument's sake, let's say I owe $1000. TT also suggests that I can offset this by investing in an IRA. So, I've got some questions about this.

First question, can I create a new IRA account, by investing $1000 to offset the $1000 we owe in our Federal income tax return? That is to say that investing $1000 into a new IRA will eliminate the $1000 we own on our income taxes? Or does it have to be something higher?

Second question. I've heard that Roth IRAs are a better investment than a traditional IRA, all other things being equal. Can I invest in a Roth IRA instead of a traditional IRA, so that it will accomplish the same positive benefits that investing in a new IRA would?

[MinhT1 · Accepted solution]

As TurboTax has indicated, you can ib=nvest in a Traditional IRA to reduce your tax. But it will not be a dollar for dollar reduction. The IRA contribution is a tax deduction. It will reduce your taxable income and will reduce your tax by the amount of contribution multiplied by your marginal tax, For example, if you invest $1,000 in an IRA and your tax bracket is 22%, your tax will be reduced by $220.

A Roth IRA contribution is not tax deductible. If you invest in a Roth IRA now, your tax will not be reduced. But when you retire, withdrawals from a Roth IRA are tax free while withdrawals from a Traditional IRA are taxed.

[fanfare]

it's not a good idea to invest in anything just because you have a tax bill.

Learn about IRAs and Roth IRAs before you put you tie up your money for fifty years or more.

Know what you're getting into.