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PPP004: Can I Invest My Tax Refund in an IRA and File an Amended Return?

Today reader Jeremy asked a tax question about IRAs and tax refunds. When you make Traditional IRA contributions, you can deduct that amount from your income and pay less in taxes. Jeremy asked if you can use your refund to make an IRA contribution, file an amended tax return, and get a second refund.

PPP004-Can-I-Invest-My-Tax-Refund-in-an-IRA-and-File-an-Amended-Return

For this episode, I brought in Nicole Rosen, a registered tax preparer, to help me answer the question. You can visit her awesome website, Finance Diva, to connect with her.

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Full Transcription

Eric Rosenberg:  Ladies and gentlemen, boys and girls, children of all ages, welcome back to the Personal Profitability Podcast. I’m your host, Eric Rosenberg, and I’m so excited to have you back for our 4th Episode. This is going to be our 2nd shorter episode, the ‘Ask Eric’ episodes, where we are going to feature a reader question and help give him an answer because that is something that many of you might also be asking. So if you ever do have a question feel free to go to personalprofitability.com, you can click on the little menu icon on the top and there’s a link to the Ask Eric page and I will help answer any question you have.

So first we are going to drop into Jeremy who asked a pretty tax-heavy question and we’ll see if we can help him out.

Hey, Eric, I wanted to know is it possible to file your taxes, get a refund and then invest in IRA and then amend the taxes to get an additional tax break. Thanks a lot.”

Eric: Thank you for very much for that question, Jeremy. Now to answer that, there are some complicated tax issues in there, so I am going to bring in a tax expert, my friend, Nicole Rosen. She is a certified tax expert and has a great answer for you. So here you go Nicole, what do you have to say?

Nicole Rosen: Hi! So if you are looking to put your money into your IRA and you have already filed your taxes, the short answer is – yes, you can file your taxes, take the money, do an amendment and then claim the extra contribution. However that is not the way I would recommend to do it. The IRS actually allows you to file your taxes and claim the contribution that is not yet done as long as you absolutely, positively promise to get it done by April 15th.

So the IRS says any contribution made between January 1st and April 15th of the current calendar year, you can choose to credit it towards the prior tax year, in this case 2014, or you can choose to credit it towards 2015. So if you know, a 100% for sure, you’re going to take your refund and put it into your IRA, then when you file your taxes, I would recommend filing it as if that contribution has already been made.

Eric: Great, thank you so much for that detailed answer, Nicole, very much appreciated. And if anyone’s looking to find you online, where should they go?

Nicole: I blog at financediva.com. I am a personal finance blogger but I focus on credit and taxes because that’s what I do during tax season because I am a manager for a national tax company. I deal with a lot of IRS issues and file thousands of taxes.

Eric: Thank you for that great detailed answer, Nicole and I hope that is helpful to you, Jeremy and everyone else listening. I actually learned something new. I didn’t know you were able to file your taxes, assuming that you are going to make that deposit as long as you do it by the cut off in April. So now I know you can do that.

File Your Contributions as Early as Possible

One thing I want to bring up and encourage you, Jeremy and anyone else who’s taking advantage of IRAs and Roth IRAs is try to make those deposits as early in the year as possible because if you do that then you have those 12 months or if you are going to do it after the calendar year ends, so making a 2015 deposit for the 2014 year, which is totally allowed by IRS rules, and I would recommend that over not making any contribution at all. But if you were going to make a contribution then I would encourage you to make that as early in the year as possible.

So let’s say you want to make your deposit in February 2015, this month, and that would be for the 2015 year. If you wait you can deposit it a year from now, but if you do that you’re losing out on 12 months of market growth. I am not a big fan of timing the market, I think that’s kind of like gambling. So rather than try to time the market, it’s better to make your investments as early as possible and invest them in a pretty conservative type of investment like a S&P 500 Index fund (that’s what Warren Buffet recommends) 0r maybe a target date fund, that’s what I have in my wife’s Roth IRA and a big portion of my own IRA. So there’s lots of ways you can choose to invest, but you want to make sure you do that as early as possible.

Prioritize Your Emergency and Retirement Funds

I’d also be concerned that if you were waiting till the last minute and trying to use the tax refund to make that investment that you might not have the savings you need or the cash cushion you need. Because if you have to wait to get that $1,000 back on your taxes to make a $1,000 deposit, I am guessing you don’t have another $1,000 stashed away for your emergency fund. So make sure before you are putting a lot of money into your retirement accounts that you have an emergency fund saved up. I would say for most people, $5,000 is a pretty good target. (Mine’s a bit bigger).But that’s important to have some kind of cushion just in case something bad happens.

So make sure you have your emergency fund saved up first before you are investing for your retirement. But then definitely make that retirement investment a very high priority. And if you can, if you have that flexibility in your emergency fund or your savings, you can make that deposit early. So then when you get your refund back from the IRS, you don’t have to worry about putting that into your IRA. You can just put it into the savings, or paying off debt or keeping it for, you know, next year’s IRS or tax-deductible IRA or Roth IRA deposit.

So there you have it, Jeremy and everyone else. Thank you for listening to this 4th episode. I just want to give a quick shout to myself. We just made it into the iTunes store and I am very excited about that. So hopefully we’ll get lots of new listeners. If you are one of those who found us through the iTunes store, ‘Welcome.’ One thing I’d like to ask of you, if you have the opportunity and you’ve enjoyed what you’ve heard here on the Personal Profitability Podcast, please just take a few seconds and give me a review in the iTunes store. Hopefully I’ve earned a 5 star review from you because those reviews and ratings really do mean a lot. It helps get this podcast out to lots of other ears and helps me grow, so I can keep giving you great blog posts and podcasts and I am working on some new videos. So I have lots of great stuff in store and your support just takes a few seconds, doesn’t cost you a cent and means the world to me. And also if you love it please take a moment and share it with a friend. And if you don’t love it that’s okay, I still love you anyway for making it this far and listening.

Thank you very much for listening to the 4th episode of the Personal Profitability Podcast and I will talk to you next time.