Spring surely must be here. The first crocuses are up; the Final Four is drawing nigh; and all the usual financial experts are handing out all the usual advice about cutting your 2012 tax bill by contributing to an IRA.
Which raises some important questions. Among them: Does throwing a couple of grand in an IRA really lower your tax liability? And how, exactly, does it help me with the IRS when I send money to one of the Gershwin brothers?
Nice (tax) work if you can get it
The retroactive IRA contribution is a little piece of time travel that allows you to lower your tax liability even after Dec. 31 has passed. Personal finance experts loooove to tout this, but many people aren't even eligible to deduct their IRA contributions. Even for those taxpayers who can, the real effect of a last-minute addition to an IRA won't make much difference in terms of what you owe.
If you're covered by a retirement plan at work, such as a 401(k), your IRA write-off phases out when your modified adjusted gross income, called MAGI, for short, is more than $92,000 (married filing jointly), or $58,000 if you're single. If your MAGI is $112,000 (or $68,000 for singletons), then you lose it altogether. If only one spouse is covered by a plan, other limits apply.
The bigger issue is that if you've plowed through your tax return and find you have to send a big check to the IRS, an 11th-hour wad of cash stuffed into your IRA isn't going to bail you out.
If you have adjusted gross income (or AGI, MAGI's older brother) of $50,000, are filing jointly and take the standard deduction with no other adjustments, you'd owe tax of $4,841 for last year. Now take the maximum $5,000 IRA contribution anyone under 50 can make, and your AGI is trimmed dollar for dollar, to $45,000. But your tax bill drops a lot less, by just $750, to $4,091.
Let's call the whole thing off
Yes, it's nice to save $750, but you still owe more than four grand to the tax man and you need to have another $5,000 handy to put in your IRA.
If you should be contributing to an IRA, then you should be putting money in all year long as part of your overall financial plan. If your retirement savings are solid, then it doesn't make any sense to park another $5,000 where you can't get at the dough until your dotage -- and you'll still have to pay tax on it, plus any gains even then.
So, when you see the next article touting "Cut Your Taxes with Last-Minute IRA Contributions!" just turn the page. As the songwriting Ira once wrote, "It Ain't Necessarily So."
(Brian J. O'Connor is an award-winning columnist for The Detroit News. Contact him at firstname.lastname@example.org.)