The other day, I wrote about funding an IRA when you’re not sure that you can afford it. While we’re on the subject, I thought I’d throw this out there, as an alternative… Next time you get a tax refund, simply plow the entire amount into an IRA. Yes, yes, I know that receiving a tax refund means that you gave the government an interest free loan, but if you get one, you might as well do something smart with it. And in some cases, this sort of ‘enforced’ saving is necessary to get people to set a little aside. The only downside to this strategy is that, once we move past Tax Day, contributions can’t be applied to the previous year.
Here’s the trick: If you file your taxes early enough, you should be able to get your return in advance of April 15th, meaning that you could still technically make a contribution for the previous year. While this could get tricky if you’re making deductible contributions to a traditional IRA, it should be smooth sailing for a Roth IRA. After all, making a deductible 2007 contribution will change the taxes that you would’ve otherwise owed, meaning that you’ll like have to file an amended return using IRS Form 1040X to get the difference back. Not a big deal, but it’s an extra step that you might not want to take. But since Roth IRA contributions are not reported on your tax return, there are no such complications — all you have to do is make sure the contribution beats the tax deadline and is coded for the previous year.
7 Responses to “Another Great Way to Fund Your IRA”
I believe that you can fund an IRA up until the day you file your taxes.
Example. You file on March 21st, 2008 for tax year 2007, if you decide to send in a check for your Roth IRA in the amount of $4000 on April 1st, technically, you missed the deadline by filing your taxes in March. Therefore the funds submitted would be for tax year 2008.
With that said, the onus is on the taxpayer to make this distinction. E-Trade, sharebuilder or whomever will not have the info of when you submitted your own taxes and will take the monies based on what you tell them. If you get audited, this type of thang could come up.
The best bet for folks who send in $100 buck here and there, is to bite the bullet one year and get ahead. You could be done contributing for tax year 2007 IN 2007 and give yourself a few months in 2007 to build up some monies to be sent in on January 1st, 2008 to get ahead for tax year 2008.
Right now I’m funding my Roth IRA out of the money I make from my revenues from my blog…I’ve been able to max it out the last 2 years…blogging one’s way to retirement… now there’s a new one.
fortune8: I agree completely, which is why I said to following in the article…
“Yes, yes, I know that receiving a tax refund means that you gave the government an interest free loan, but if you get one, you might as well do something smart with it. And in some cases, this sort of â€˜enforcedâ€™ saving is necessary to get people to set a little aside.”
I agree that it is not the best idea, but there are many people who do not necessarily have the discipline to save. This strategy will be easier, as they really can’t touch the money until they get a refund.
Personally, I lower my tax withholdings as low as I possibly can without setting off flags with the IRS. If you have over 9 exemptions, the IRS has you flagged in the system. Since I have three kids, and I am the sole wage earner, I get many exemptions, but I only claim up to 9 for my withholdings. So, I still get a nice chunk back at the end of the year.
If H&R Block prepares your return, then you can fund your IRA using your refund. Using your tax refund to fund your IRA is bad tax planning to begin with. Modify your withhodings so that less taxes are taken out and you can fund your IRA on a monthly basis using dollar cost averaging. However, if you are not discipline enough to save, then having the IRS take the money from you up front may be the only way.
That’s great advice. It might hurt the first year as you’re used to doing other things with the money, but really, after getting in the habit – it’s a great idea.
This also applies to ESAs (Education Savings Accounts)…
ESAs are funded “after-tax”, so you have until April 15…
(Who used this very technique two years ago…)