Can a Traditional IRA Increase My Refund?

by Maggie McCormick

The traditional IRA is a tax-deferred retirement investment vehicle, which means that you won't have to pay taxes on the money until you start to make withdrawals. This can work out to your favor if you're expecting a refund, increasing the amount you'll receive. The maximum amount that you can contribute to an IRA is $5,000 as of the time of publication ($6,000 if you are over 50 years of age), so plan accordingly to reap the most benefits.

Deductible Investment

The money in your IRA should be pre-tax dollars, but you probably used taxed dollars when you made the contribution. To make up for this, you can take a deduction when you file your taxes. You can deduct the full amount that you contributed, unless you are part of an employer-sponsored retirement plan (a pension, not a 401K). If your employer contributed to a 501(c)(18) plan on your behalf for this employer-sponsored retirement plan, you must subtract that amount from the contribution that you made to your IRA.

Contribution Deadline

The deadline for making IRA contributions is April 15 of the year following the current year. For example, if you want to make a 2011 contribution to your IRA, you'll have until April 14, 2012. This presents an excellent opportunity for those who earn an end-of-year bonus to "top off" the IRA contribution for that year.

Spouses and Employer-Sponsored Retirement Plans

If your spouse has an employer-sponsored retirement plan, but you do not, you may not be eligible to deduct the full amount of your traditional IRA contribution, which can affect your refund amount. Couples filing a joint tax return earning less than $169,000 total can deduct the full amount, as of the time of publication. If your joint income is between $169,000 and $179,000 you can take a partial deduction, but if your combined income exceeds $179,000, you cannot deduct any of your contribution.

Factors That Affect Refund

You owe taxes on the amount of income that you earned, minus any deductions for which you are eligible. Thus, when you deduct the amount that you contributed to your traditional IRA, you reduce the amount of taxable income you have and you'll owe less in taxes. Assuming that you've overpaid your taxes through the usual payroll deductions, your refund will increase. However, if you did not have enough taken out of your paycheck to cover the amount of taxes you owe, IRA contributions will not necessarily earn you a refund, but they will reduce the amount you have to pay in taxes.