Boost Your Tax Refund with an IRA Contribution

One of the nice things about preparing your taxes, and this is probably the only nice thing, is that if you overpaid your taxes then you’ll get your money back. If you’re getting anywhere near last year’s average tax refund of $2700, let me suggest an idea that could give you an even larger tax refund.

If you haven’t made a contribution to an IRA for 2009, consider taking your refund and putting it towards a deductible Traditional IRA. If you qualify for a tax deduction on Traditional IRA contributions, then you will see an even larger refund. The net cash in your pocket will be lower, since you’ve contributed a large sum into your Traditional IRA, but you will pay less in taxes and likely thank yourself when you retire. If you make a contribution, remember to adjust your tax return to reflect this contribution so you get a bigger return.

In addition to lowering your tax liability, you also lower your adjusted gross income and potentially trigger the Saver’s Credit. This may allow you to take deductions that were phased out for you, such as the earned income tax credit. Contributions to a tax deductible IRA will reduce your adjusted gross income but are not factored into your modified adjusted gross income (in other words, the contribution is added back to calculate your MAGI).

There are some big caveats to this idea.

First, not everyone can deduct contributions to a Traditional IRA and the rules for how much you can deduct can be a little convoluted, but outlined in Chapter 1 of Publication 590. Consult a tax professional for your specific case but in general you are not eligible to deduct contributions if you have access to an employer retirement plan and your modified AGI is over $66,000 (single) or $109,000 (married filed jointly). You can read the deduction rules in this part of Pub 590.

The Roth IRA and Traditional IRA share the same contribution limits, which is $5,000 for 2009 ($6,000 if you’re 50+). If you contribute $1,000 towards your Roth, you may only contribute $4,000 to your Traditional. Given the option, I believe that contributing to a Roth is better than contributing to a tax deductible Traditional IRA as I believe tax rates will go up in the future.

Finally, even if you file electronically and get your refund in less than 10 days, you still need to find a way to float yourself the money in the interim. Depending on the size of your refund and how large of a contribution you want to make, this may be a difficult task. If you don’t want to or can’t float the money, you can always file your return, get your refund, make a contribution before April 15th, and then file an amended 1040X return.

Despite all the caveats, this may be an attractive option for some people out there and I’m curious to hear your thoughts on it. Good idea or more work than its worth?

Jim writes about personal finance at

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