Apr
9
First Work Year – Once In a Lifetime Opportunity
April 9, 2007 | 1 Comment
Many people start their careers a few months after graduation (be it from school or college). Most people complete their degrees in summer, and that makes them very prone to earning half a year worth of salary on the very first year they work. It is not that bad, as they happen to get the same amount every month, and get to enjoy every one of those first months of their career.For those people, there is a very particular opportunity: the income reported to the tax authorities will be half of what they will report on the next year. The income reported to the IRS may allow for tax advantages that will not be available on the coming years.
For a $40,000/yr earner in the USA, this may mean earnings of $20,000 or less. With a Traditional IRA or 401k it should be easy to get a Federal Tax Free Year (between the IRA deduction and the saver’s credit). For those people who get a report of $15,000 for the Federal Tax year, this may mean that they can open a Roth IRA, get savers credit, and not pay any federal tax for such year, no tax for the money placed on the Roth IRA now, and no tax for the money taken out of the Roth IRA after they are 59 ½ years old.
For that very special moment in a young man or woman’s life, when they start their career midyear, there is a way to avoid one of the two life’s certainties: taxes.
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I was the beneficiary of just such a year. I got a full $200 tax credit for putting money into my retirement accounts.
Interesting thing is with the Roth. Now that I’ve gotten the tax credit I could technically pull the contribution back out (since Roth’s are after tax money). I’m not sure why I would, but you could.
-limeade