I, like everyone else in the country (or at least it should be everyone else in the country), am doing my taxes now. I have been dreading doing my taxes because I pretty much knew I’d be on the hook to pay in this year. Well, I was right. After running all of the calculations it comes down to a balance of a little over $1000 that I need to pay in to the IRS. I was looking at a decent refund until I entered in my side income for the year. I pretty much knew that would happen so I started taking out additional money from my paycheck towards the end of last year to compensate. Unfortunately I didn’t start that soon enough.
This morning my wife called me on her way to work and said, “Hey honey. Can we donate money before April 15th and deduct that from our taxes?” I told her that I didn’t think you could do that and then it hit me. Why in the world aren’t we just contributing to an IRA for my wife to lower our overall income level for 2007? She has been working in a contract position all year which didn’t offer any sort of retirement plan. I had been thinking that it was just an unfortunate “bummer” for her being in a contract position. For some reason it never occurred to me that we should just contribute funds to an IRA for her outside of her company. Frankly, I think it’s pretty pathetic that I didn’t think about this considering the fact that I run a personal finance blog and spend a lot of time on my fellow PF blogger sites.
Anyway, I’m doing the research now to figure out how to go about putting a chunk of money in to an existing IRA that my wife has at our credit union. We rolled her 401k money over from an old job a couple years ago and since it wasn’t very much money, we have just let it sit there. With this contribution, we’ll eventually move it out of the lower yield account and in to a brokerage account that is IRA qualified.
After making this contribution it will change our tax return from owing over $1000 to getting $12 back. I tried to zero it out completely but Turbotax wouldn’t let me. I’m assuming that the tax tables just don’t work down to that level. (In other words, since they go in ranges, I can’t get to zero)
So, instead of having to dig up a little over $1000 to pay in taxes, I’m now going to pay our future selves about $3500!
(Update: I’m still trying to figure this out. My wife has said all along that she wasn’t eligible for her plan and box 13 on her W2 does not have a check for retirement plan but she called HR and they said she can contribute now. So, I’m just trying to do all of my due diligence before I invest in an IRA for her. If anyone has any advice, please leave a comment. And no, I won’t hold you liable for any bad advice…. :)
I don’t know how it actually works, but our financial advisor that monitors our IRAs sent us a letter reminding us of how much we could still contribute to our IRAs for last year, so I know it does work. Good luck!
You can just open a traditional IRA with Sharebuilder and contribute before April 15. They’ll even give you 7 free trades as bonus:)
We did the same thing for my boyfriend because he had had two jobs for a while last year and hadn’t adjusted his withholdings – he would have owed quite a bit in taxes and penalties. We opened an IRA with Vanguard, and designated the funds as being a contribution for 2007, so now he gets a small refund for Federal and only owes a couple hundred on the State return.
An employer’s checking off the “retirement plan” box just subjects you to the income limitations. So you just need to go to the instrux or website (irs) to figure out if you can deduct a given level of contribution or not.
HTH.