EXAMPLE:

The maximum contribution to a deductible IRA is currently $5,000, unless you’re age 50 or older, then it’s $6,000.

If you are in the 25% federal income tax bracket (your taxable income is greater than $32,500 if you’re single, or greater than $65,100 if you’re married) PLUS the DC income tax rate of 6%, then your combined tax rate is 31%.

So, if you contribute $5,000 to an IRA, you will save $1,550 in combined federal and DC taxes. So, it will cost you only $3,450 to invest $5,000.

In addition, if your income is below $16,000 (single) or $32,000 (married) you can get an additional Retirement Saver’s Credit of up to 50%!!

The same math works for 401(k) or 403(b) plans, the Thrift Savings Plan, and other employer-sponsored pre-tax retirement savings plans.

Click here to go back to the February 2009 Ask A Certified Financial Planner™ Professional column.