Individual retirement arrangements, or IRAs, provide tax incentives for saving for retirement. If you can afford it, I strongly encourage everybody to contribute at least a little bit to a Roth IRA every year, even if you have a 401(k) or other retirement plan at work. And among the many benefits of IRAs is the fact that you can make prior year IRA contributions up until April 15 each year.
What are prior year IRA contributions?
Ok, so every year you file your tax returns on or around April 15.
Fun fact: In 2023, you have until Tuesday, April 18th to file your Federal tax return. This is because April 15th falls on a Saturday, and the city of Washington, D.C. celebrates Emancipation Day every year on April 16th. Except this year that holiday is observed on Monday that 17th. Bottom line? You get three extra days to file your taxes.
As you prepare your tax return, you collect deductible expenses (like student loan or mortgage interest) that you paid last year, before December 31st. If you determine in April that you didn’t pay enough tax last year and will owe the IRS, you can’t write a check to charity and count it for last year to reduce your taxable income – it’s too late.
Fortunately, however, you can make prior year IRA contributions up until the tax filing date. So if you meant to start an IRA last year but forgot, you can still open an account, fund it, and count the contributions for the prior tax year.
Why would you want make prior year IRA contributions?
Maybe you forgot to open an IRA last year, or you only contributed a little bit and realize you have more money to save up until the annual limit.
Perhaps you discovered that you’re going to owe the IRS some money and you want to reduce your tax bill. If you haven’t already maxed out your IRA for last year, you can make traditional IRA contributions that are tax deductible. (For example, if you contribute $6,500 to a traditional IRA before April 15 you can reduce last year’s taxable income by $6,500 and reduce the amount you owe by some percentage).
Note that this only works with traditional IRAs. You cannot deduct contributions to a Roth IRA because the money can be withdrawn tax-free during retirement. In general, I recommend young people open Roth IRAs instead of traditional IRAs because, in most cases, your tax rate will be higher in 30 or 40 years than it is now. That said, reducing an unexpected tax bill would be a good reason to put some cash into a traditional IRA.
All IRA contributions—traditional or Roth—are subject to annual contribution limits and income limits.
Need to open an IRA?
Read about the best places to open an IRA or check out our recommended investment accounts for young investors – all offer IRA accounts in which you can invest in a variety of stocks, bonds, and mutual funds.
Also, if you’re looking to make sure your IRA is performing the best it possibly can – check out a company called blooom. Their goal is to help you make sure your IRA is rebalanced periodically, so you’re getting the returns you deserve. blooom is an easy way to manage your IRA, and you won’t have to do any of the work!
There’s always Wealthfront, too. They take the time to understand your individual needs and are constantly making adjustments based on your financial goals. Plus, they’ll even recommend the right type of retirement account for you if you have no idea where to start!
Get detailed information about individual retirement arrangements from the IRS website.
Recommended Investing Partners
- Recommended M1 Finance gives you the benefits of a robo-advisor with the control of a traditional brokerage. M1 charges no commissions or management fees, and their minimum starting balance is just $100. Visit Site
- $10 to get started Low fee robo-advisor, only $10 to get started. Offers multiple automated portfolio options Visit Site
- $500 minimum Wealthfront requires a $500 minimum investment and charges a very competitive fee of 0.25% per year on portfolios over $10,000. Visit Site