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.