IRA with IRS refund

[Guest cwilliams2121]

I am 25 and finally a little late deciding to start investing. I have done alot of reading and will be investing this year in a traditional IRA. My question is if I invest 4,000 for myself and 4,000 for my wife in a traditional IRA I will get an additional $2,000 back on my refund, 25% of 8,000.

So my question is can I mark that I am putting money into an IRA, and then wait for my refund to come in, then contribute to an IRA before April 15th. If so how does the IRS get confirmation that I actually contributed and does it matter if I file my taxes before putting money into an IRA as long as the money gets put in by April 15h?

Thanks in advance for any advice.

[WDIK]

According to Publication 590,

"You can file your return claiming a traditional IRA contribution before the contribution is actually made. However, the contribution must be made by the due date of your return, not including extensions."

[Guest cwilliams2121]

Thank you so much...

Now I am going to file my taxes tonight and start the broker search for the IRA. Will keep a few aspirins handy just in case.

Since I am not getting the money until the IRS gets around to it I should have a good 2-3 weeks to decide on a broker.

Thanks again.

[Guest mjb]

If you dont get your refund by 4/15 you can use any other soruce of income to fund the IRA such as a line of credit, creit cards, home equity line of credit, or evan a loan fram a retirement plan.

[John G]

I am wondering why you want to go the traditional IRA approach. Sure you get a deductable amount now, but at a price. All withdrawals in the future from this regular IRA will be taxed as ordinary income... and if you are successful in life - that could well mean a higher tax rate. If you go the Roth route, you don't get the deduction, but all your withdrawals are tax free. With Roths, you can also withdraw contributions at any time... not that you really want to do this, but the option is there.

Twenty five years old means starting late? No, no, no! OK, you are not teenagers with a Roth started by mom and dad (you won't make that mistake with your kids of course). Starting late is when you are in your late 30s or worse yet 40s. You are wise to think about a systematic investing program at the age of 25.

If you continue at 4k each for 40 years you will have set aside $320,000. At 8% average annual return (which I believe represents a mix of small part growth stocks, conservative stocks, dividend paying stocks and bonds) you will have over $2 million when you are 65. If your investments return 10% you should expect about $3.5 million. While you don't want to plan on a higher return, at 12% (more representative of a heavy bias towards growth stocks and minimal bond/dividend options) you might be looking at $6.1 million in retirement assets at age 65. All nominal or current year (2046) dollars, but even with inflation any of these results would be a very comfortable nest egg. Note, the higher numbers under a regular IRA would have mandatory distributions and the tax bite could be very high. So, if you are going to be aggressive about building a retirement fortune.... the Roth might work out better.

Note all of the above are just Roth/IRA projections and do not include any company plans or home equity!

Welcome to the world of investing, USA style!

[saabraa]

Thanks in advance for any advice.

I'm addressing a question you didn't ask and perhaps have already considered. If either you or your spouse has a Form w-2 where the "pension plan" box is checked, it's likely one or both of you is not eligible for the full $4,000 deduction. The 'active participant' rules kick in when you're considered to have participated in a business sponsored plan for the given year. When you're an active participant, you need to look at income level to calculate how much of a deduction is allowed, if any.