Most people know that April 15th is the deadline for tax returns. But it’s also an important deadline for your retirement savings. April 15th is also the deadline for contributing to your previous year’s IRA contribution limit. This can have important consequences for your retirement savings.
What’s an IRA?
IRAs are Individual Retirement Accounts. They are savings and investment accounts that are tax-advantaged. The two main types are Traditional and Roth IRAs. They are both tax-advantaged but in different ways. With a Traditional IRA, you can contribute money before taxes, lowering your current-year tax bill, and potentially freeing up more savings than you would have otherwise. With a Roth IRA, you contribute after-tax money, but the money grows in the account tax-free.
Why are there contribution limits?
Because both types of IRAs confer substantial tax benefits, the government limits the amount you can contribute each year. For 2019, this limit was $6,000 or your total taxable income, whichever is lower. This limit applies to all your IRAs collectively, and there are additional limits to Roth IRA contributions if your income is above certain amounts.
Why is the limit important? Can’t I just catch up next year?
The limit is important because the tax advantage of these accounts is quite valuable. By the time you retire, the tax savings can add up to tens of thousands of dollars. So it’s very important to do everything possible to max out your contribution each and every year. The more money you can get into these tax shelters, the more tax savings you will realize over your lifetime, and the more money you will have at retirement!
There’s still time! Contribute to 2019 and 2020 while you’re at it!
The good news is that you haven’t missed the opportunity to get some of your money in under the 2019 limit. You can designate money contributed to an IRA as either 2019 or 2020 money any time before April 15th. That means that today you can donate $6,000 as 2019 money, then $6,000 as 2020 money without running afoul of the contribution limit rules.
Another benefit of this extended IRA contribution period is that many people receive their year-end performance bonuses at the beginning of the following year. So, if you are expecting to get some extra money in February or March, make a plan to contribute as much as possible of it to your IRAs. If you don’t have one, give me a call and we can get you set up!
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