Prior Year IRA Contributions
For some people, a contribution to their traditional IRA can be deductible, even if it is a late contribution.
The best part is that the deposit into the IRA account doesn’t have to happen by December 31st to count toward saving on the taxes that are filed in the spring. Most taxpayers actually have until April 15 to make their IRA contribution and have it count toward last year’s taxes. So, you can cut your tax bill and help your retirement plan by increasing your retirement savings at the same time.
This allows you to do your taxes in TurboTax or TaxCut or other software, or have your accountant do them, and then after seeing the preliminary results, you can lower the amount of taxes you still have to pay to the IRS by making an IRA contribution instead.
How Deducting a Traditional IRA Contribution Works
If you are eligible for a tax-deductible IRA contribution, the amount you contribute is deducted from your taxable income. This results in a lower tax bill.
However, IRA contributions are deductions, not credits, so it is not a one-for-one reduction. For example, if a taxpayer is in the 30% (thirty percent) tax bracket, and they contribute $2,000 to their IRA, that will reduce the amount of taxes they pay by $600. ($2,000 x 30% = $600)
So, if your accountant or bookkeeper tells you that you have to send the IRS an $800 when you file your tax return, you can erase the amount you owe by making a big enough deductible IRA contribution.
In this case, if we again assume a 30% tax bracket, a $2,667 contribution would eliminate the amount owed for last year’s taxes by way of the $800 deduction.
How-To Contribute To An IRA And Still Get A Tax Deduction for 2008
Making the contribution to an IRA to get the tax deduction for last year is relatively simple, if you know how to ask. If you already have an IRA account, contact your broker or mutual fund company and tell them you want to make a “prior year” IRA contribution.
The key phrase that helps financial industry professionals know what you are trying to do is “prior year.” By saying those words, the IRA custodian, like Fidelity or Charles Schwab, will properly code your contribution so that it is reported properly to the IRS.
Now, go enjoy the good feeling of having both saved for your retirement and beaten the IRS at the tax game.