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Being the procrastinator that I am, I just did a preliminary entry into Turbotax and found that for the first time ever, I owe a considerable amount (about $3000) on my taxes. I think this is because the amount withheld from my bonus is much less than my federal tax rate (and actually the rate at which state tax was withheld was higher than my state tax rate, but the refund I'm getting there is not nearly enough to make up for the federal amount that I owe).

In any case, is it possible to open an IRA and contribute money to that to reduce my tax burden for 2012, now that it is April 2013?

From reading around, my salary may be relevant - my taxable income was roughly $230,000 in 2012.

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  • Does your company offer a 401(k) or similar?
    – JTP - Apologise to Monica ♦
    Commented Apr 9, 2013 at 18:42
  • "reduce my tax burden" is a misguided and meaningless concept. You are giving up more money from your pocket by putting it in the IRA, so it is "increasing" the burden you're paying, not reducing. You have to consider the end result and the comparison between Roth and Traditional accounts. If your income is high, and you expect it to be lower in the future, then yes, that would be a reason to use a pre-tax account like deductible Traditional IRA. Also, what is such a high-income person like you doing not having planned out finances before-hand?
    – user102008
    Commented Apr 9, 2013 at 23:10
  • @Joe - yes, a 401k which I participate in.
    – Jer
    Commented Apr 11, 2013 at 15:24
  • @user102008 - I understand now that the contribution isn't tax deductible because of my salary and company's 401k plan, but if it was, wouldn't that reduce my tax burden? I'd be paying tax on less income, no? And my finances are (fairly) well planned out, I think. I save a ton (about 70% of my take-home pay; part of that is maxing out my 401k). I think that's reasonable and should be enough for retirement (i.e. no IRA), but this is the first time I've ever owed money on my taxes so I figured it made sense to investigate the IRA option.
    – Jer
    Commented Apr 11, 2013 at 15:26
  • To respond to the taxes owed - it's time to adjust your withholdings via W4 - my article will explain the process - blogs.hrblock.com/2013/01/14/…
    – JTP - Apologise to Monica ♦
    Commented Apr 11, 2013 at 17:30

1 Answer 1

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my taxable income was roughly $230,000 in 2012.

Indeed it is relevant. The highest AGI limit for deductible IRA contributions is 112K. So no, IRA contribution will not help you reducing your tax bill this year.

The deduction phases out starting from AGI limits of $10K in certain cases (for married filing separately), and phases out entirely for anyone at AGI of 112K (for 2012). The table linked describes the various deduction phase-out parameters depending on your filing status, and will probably be updated yearly by the IRS.

However this is only relevant if your company provides a retirement plan, as Joe mentioned. If your company doesn't provide a retirement plan but your spouse's does - then the AGI phase-out limit is $178K.

If neither you nor your spouse (if you have one) is covered - then there's no AGI limit, and you can indeed make an IRA contribution before April 15th that would be attributed to the previous year and reduce your tax bill.

Note that "provides" means the plan is available, even if you don't participate in it, any time during the year.

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  • It might be interesting to expand the answer to consider if his income was less than 112K, if you know this. It'd be too late in Canada regardless of income, for example. Jer is in the U.S., obviously.
    – ChrisInEdmonton
    Commented Apr 9, 2013 at 18:28
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    Only if Jer's employer offers a retirement account. No 401(k), no IRA restriction.
    – JTP - Apologise to Monica ♦
    Commented Apr 9, 2013 at 18:43
  • @Joe you're right, totally forgot about that
    – littleadv
    Commented Apr 9, 2013 at 18:59
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    I think Joe's answer includes but does not emphasize an additional point. If the taxpayer's employer or the taxpayer's spouse's employer offers a 401k plan (or 403b plan etc) to its employees, then the restrictions kick in even if the taxpayer or taxpayer's spouse do not participate in the 401k plan, and even if the coverage is for one day of the year only.
    – Dilip Sarwate
    Commented Apr 9, 2013 at 19:17
  • Thanks! I guess on the bright side I don't need to worry about it with so little time left!
    – Jer
    Commented Apr 11, 2013 at 15:27

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