Taxes - Traditional IRA - would you do this?

OK, I was wrapping up my taxes this morning and had a thought.

If you didn't contribute to your retirement to the max and still had the opportunity (you have until 4/15/08 to contribute for 2007), would you do something like this.

You're eligible to contribute the max ($4000 or $5000 if you're over 50) to a Traditional IRA.

You don't have the cash available but you do have a line of credit through your home or something.

Would you borrow from your line-of-credit to put the money into an IRA?

I was thinking it was a good idea. Here's why.
If you don't take the IRA, that $4000 is sitting in your income section and is taxed at let's say 20%. Well, you just paid (gave away) $800 in taxes that you'll never see again.

If you borrowed the money and got the IRA and took the deduction, your taxes go down by that $800.

You now have to pay interest on the $4K borrowed but interest rates are relatively low and if you don't drag it out, you probably wouldn't pay more than $100 in interest.

Well, the interest made by your $4000 IRA investment would probably come darn close to what you paid in interest to borrow the money.

You take that $800 saved in taxes and immediately apply it to the loan so you're already down to $3200.

So, in theory, although you had to borrow it, it's well worth it as long as you don't let that $4K borrowed take forever to pay back...

Another thing to take into consideration is your age. By putting the money into a traditional IRA, all that one is doing is deferring the tax. What is your retirement income going to be compared to your current income, taking into account the taxation of social security benefits?

bczoom said:

Would you borrow from your line-of-credit to put the money into an IRA?

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Yes.

Although I would prefer to tighten my belt and pay for it out of pocket.

My reasoning: money put away now when you can afford it is easy money. Who knows what your income-earning ability is going to be 20 years from now when you might really have a critical need to live on savings for a while. If that potential savings deposit slips through your fingers now, you'll never make it up later.

And:
It worked for me. I retired at 54. To oversimplify, money compounded in the IRAs I put away years earlier is what put both daughters through college. I would probably still be working today (64) if I covered that college expense out of wages earned while they were in college, plus had taken out the inevitable loans to cover that peak in family costs.

California said:

Yes.

Although I would prefer to tighten my belt and pay for it out of pocket.

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Agreed. I was thinking as a last minute thing (like now through 4/15) where people may be seeing a tax bill and money for the IRA wasn't saved previously.

RD2 - Agreed. It wouldn't make any sense on a Roth or similar. It was just a way to save and knock an existing tax liability down.