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Need cash for IRA contribution? Ask Uncle Sam

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in Small Business Tax

It happens to some taxpayers every spring: You scrape together the cash needed for the maximum IRA contribution before filing your return. But this can be tougher than usual if you’re facing high expenses—say, tuition costs for your children or new car payments—and most of your funds are tied up in investments. You have only until April 18, 2011, to free up enough cash for a 2010 contribution.

Strategy: File your tax return early and claim the full IRA contribution. But don’t actually make the contribution until you receive your tax refund. Then you can use the refund money to contribute the max to the IRA.    

In effect, Uncle Sam makes the contribution for you by sending you a refund before April 18. Obviously, the idea won’t work if you’re not entitled to a refund. 

This technique may sound a little shady, but it’s perfectly legit. The IRS has given express permission to use it as long as you deposit the contribution before the deadline. (IRS Revenue Ruling 84-18) The IRS doesn’t really care where the money is coming from as long as it arrives on time.

The maximum contribution allowed for the 2010 tax year is $5,000, plus you can chip in an extra $1,000 if you’re age 50 or older. The same limits apply to contributions to Roth IRAs.

Tip: The IRS makes it easy to use this technique. Simply attach Form 8888, Allocation of Refund (Including Savings Bond Purchases), to your return to indicate the amount allocated to an IRA contribution.

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