A Roth IRA does not reduce your current taxable income -- it may reduce future taxable income.
Contributions to an IRA or 401(k) must come from "compensation," as defined in the following table:
|Includes ... ||Does not include ... |
| ||earnings and profits from |
|wages, salaries, etc. || |
| ||interest and |
|commissions. || |
| ||pension or annuity |
|self-employment income. || |
| ||deferred compensation. |
|alimony and separate maintenance. || |
| ||income from certain |
|military differential pay. || |
| ||any amounts you exclude |
|nontaxable combat pay. || |
You stated that your income is from an "investment." If so, then that income is not compensation, and cannot be contributed to an IRA or 401(k).
Purchasing tax-free munis also may reduce future taxable income, but it will not reduce your current income from the investment that you are receiving.
What you may want to consider is that at the moment, the federal capital gains tax and ordinary income tax
is set to rise to ordinary income tax rates on Jan 1, 2011. Absent Congressional action, if you can receive your investment prior to year end, then you will almost certainly save at least 5% in taxes, because the current Democratic plan is to limit the capital gains rate to 20%. And, if the battle between Democrats and Republicans continues after the election tomorrow, then that 5% is probably the best that you can hope for. Therefore, receiving the income this year is probably the single most optimal action you could take.
The second most optimal action is to relocate your permanent residence immediately to a U.S. state jurisdiction which has no personal income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.). You only have to permanently reside in one of these jurisdictions during the tax year in which you receive your income. This could additionally reduce your overall tax liability considerably.
In my view, the most optimal tax arrangement is to live in Washington State, but on the Oregon border, because Washington has no state personal income tax, and Oregon has no state sales tax
. Therefore, if you receive income in WA and shop in OR, then you will have a zero state tax liability.
Hope this helps.