I had opened a Roth IRA last year specifically so that I could deduct my contributions from my taxes for 2023. Yesterday I learned that with a Roth IRA you can't actually do this, and it only works for a traditional IRA. I have a meeting with my financial adviser tomorrow.
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@singer You won’t “save $6500” but you shouldn’t have any problem just pulling money out of your Roth and putting it into a traditional. The only complication is any gains you had over the course of the year. I think you take a penalty on that, but the hit shouldn’t be too bad if you just started the account.
Your tax software should ask you if you withdrew early. You’ll pay normal taxes and then 10% penalty. Probably less than $50 penalty depending on your allocation.
@TommyEagle Would it be because I'm making the traditional IRA too late in the year that I won't be able to do the $6500 deduction? I was planning to put that much money in it so that I could deduct that from my taxes. I read that $6500 is the maximum amount that can be deducted each year (Claude says it's $6500, chatgpt says it's $6000).
@singer It’s 6500 limit - the max amount you can put in unless you’re over 50. Don’t confuse this with the amount your taxes will be reduced by though. If you itemize your taxes and you have $20K in existing deductions and your income is $100K, putting 6500 in the trad Ira reduces “taxable income” by 6500. So your deductions go to 20000 + 6500 = 26500. You pay taxes on the other income 100K - 26500 = 73500. Then you pay taxes on that income based on the rates for different brackets instead of paying taxes on 80k.
I should not have limited my response to saying if you itemize, you get the reduction in taxable income regardless of whether you itemize or not