We all know we have until mid-April every year to file our individual income tax returns, but did you know you also have until Tax Day to make a contribution to your IRA account and consider it being made last year?
That means you can contribute a total of $6,000 (or $7,000 if you’re 50 or older) to your traditional IRA or Roth IRA anytime up to April 18, 2023, and count it as a contribution made in 2022!
How does this benefit me?
Making a prior-year contribution often has more benefits than making a current-year contribution.
First, if you complete a draft of your tax return and realize you’d like to reduce your taxable income, you can make a prior-year contribution to a traditional IRA to achieve that goal.
Furthermore, making a prior-year contribution allows you to maximize the amount of money saved for retirement, as it gives you an extra year to contribute when you otherwise would have lost your opportunity to contribute last year.
Finally, if you know you will reach the Roth IRA income limit this year but did not last year, you may want to take advantage of the ability to contribute to a Roth IRA now — while you still can — using a prior-year contribution.
What else should I know?
If you decide to make this type of contribution, make sure the financial institution administering your account accurately codes the contribution as being made in the previous year.
Also, remember you need to have earned income in 2022 — as an employee or through self-employment — at least equal to your contribution amount to make a prior-year contribution.
If you plan to make a prior-year contribution to a traditional IRA, wait to file your tax return until you’ve made the contribution — or at least until you know how much you will be contributing.
But don’t worry if you’ve already filed before making a contribution; the option remains to file an amended return so you can take advantage of the decrease in your taxable income.
Lastly, since there are benefits to making a prior-year contribution to a traditional IRA and a Roth IRA, you might find it advantageous to have both types of accounts, depending on your financial situation and goals.
The maximum contribution limits apply to all contributions you make to any IRA account, so keep in mind that you can’t contribute $6,000 (or $7,000 if you’re 50 or older) to each account — but you can choose to split up your contributions, such as $2,000 to a traditional IRA and $4,000 to a Roth IRA.
This can be a powerful strategy when it comes to saving for retirement, as it allows you to spread your savings across pre-tax and post-tax accounts, and it will give you more flexibility when tax season comes around.
If you have questions, would like more information on making a prior-year contribution, or would like to set up an IRA account, send us a note. We’re happy to help with any of your IRA needs!
