There's just one week remaining before federal income taxes are due this year on July 15, a three-month extension from the typical Tax Day deadline the IRS granted in light of the coronavirus pandemic.
When the IRS pushed back the tax filing deadline to July 15, the agency also pushed back the cut off to put money into individual retirement accounts. While you can make contributions to your IRA year-round, any money added to these accounts counts toward a specific tax year. That's because these accounts are tax advantaged, which means that, depending on the type of account, you could receive a break on your tax bill by contributing. In this case, you can still make 2019 contributions of up to $6,000 ($7,000 if you're 50 or older) until July 15, 2020.
This is an important opportunity any retirement saver should know about, says Kevin Martin, principal tax research analyst with The Tax Institute at H&R Block.
There's generally a bit of a flurry to make last-minute contributions to IRAs right before Tax Day. In fact, Fidelity found that 34% of filers put money into IRAs during the last three weeks before the tax deadline in 2019.
As of May 31, Fidelity saw a 14% year-over-year increase in IRA contributions. Just over 50,000 of the investment firm's clients have taken advantage of the IRS filing extension to make 2019 contributions to their IRAs, Fidelity reports.
"With Tax Day approaching, now is the perfect time to think about contributing to an IRA, because it offers considerable tax benefits. You might even be able to reduce your 2019 tax bill," says Sarah Holden, Investment Company Institute's senior director of retirement and investor research.
Here's what you should know about IRAs and making a last minute contribution.
The two most common types of IRAs used for retirement savings are traditional and Roth. Traditional IRAs are a tax-free investment account where money is added before taxes are taken out and allowed to grow without incurring any yearly income or capital gains taxes. A lot of times Americans end up with traditional IRAs because they roll over a 401(k) account (which is also funded through pre-tax dollars) from an old employer into this type of account.
Because funds are added to a traditional IRA before taxes are taken out, contributions can lower your overall taxable income for the year, similar to contributing to a 401(k).
Roth IRAs also provide tax advantages. Unlike a traditional IRA, any money you put into a Roth is added after taxes are taken out of your paycheck. The money is then allowed to grow tax-free, and you don't have to pay income taxes on future withdrawals if you make them correctly.
There are income limits though: The ability to contribute the full amount to a Roth IRA starts to phase out at adjusted gross income levels of $122,000 for single filers and $193,000 for those who are married and filing jointly in 2019, according to the IRS. There are no income limits for a traditional IRA.
In addition to traditional and Roth IRAs, there are Simplified Employee Pension plans, also known as SEP IRAs. These types of IRAs are a good option for those who are self-employed, freelancers or independent contractors. It's similar to a traditional IRA, but these accounts allow you to deposit much more, up to 20% of your earnings, with a maximum of $56,000 for 2019.
If you don't already have an IRA, now may be a good time to open one. Just over 46 million U.S. households have accumulated about $10 trillion in IRAs, according to the Investment Company Institute.
You can set up an IRA with any of the major brokerages or a robo-advisor like Betterment or Wealthfront. If you opt for a brokerage, you'll need to not only fund the account, but also select where and how you want to invest the money. With a robo-advisor, once you add money to the account, you'll be invested in a portfolio that's managed for you based on your goals and your appropriate risk level.
Many times, an IRA can be set up fairly easily. But if you're considering taking this step, it's a good idea to do so as soon as possible. Don't wait until the day before Tax Day.
If you're looking to snag some potential tax savings this year, aim to set up a traditional IRA. If your employer allows it, you may be able to pull money, pre-tax, directly from your paycheck to deposit into an IRA. Talk with your HR manager to determine if this available, and if not, it may be something to consider for next year.
You can always put money that's already been taxed into a traditional IRA, but you'll need to keep track of that if you do so you can avoid being double-taxed when you eventually make withdrawals in retirement.
You can also set up a Roth IRA and contribute regularly from your checking account, or make deposits to your IRA as you can. But again, contributing post-tax money to an IRA won't lower your pre-tax income levels for your tax bill this year.
In addition to lowering your taxable income through IRA contributions, funneling money into these accounts may also qualify you for the "Saver's Credit." This can provide a tax credit of up to $1,000 ($2,000 if married filing jointly) if you contribute to a retirement plan, including 401(k)s, IRAs and 403(b) plans, Holden says. This credit is available for single filers earning up to $32,000 in adjusted gross income in 2019 (for heads of household, the limit is $48,000; for those filing jointly, it's up to $64,000).
While tax breaks are helpful, the real goal of these accounts should be retirement savings. Getting in the habit of regularly contributing now can make a significant impact over time. A $6,000 contribution today could grow to be worth over $64,000 after 35 years, assuming a 7% rate of return, Fidelity says. Even if you can't max out your IRA for 2019, every little bit helps.
If you've already filed your 2019 state and federal income taxes, you can still make 2019 contributions to your IRA. But the tax benefits may not be as readily available.
"It's not too late to contribute, even if you already filed your return," Martin says. However, in order to see the full tax benefits, you may need to amend your return to report a deduction if you did not report the IRA contribution on your original return, he says. He recommends that if you're looking pursue this, get advice from a tax professional.
If you don't want to file an amended return, you could also consider the extra contribution as a nondeductible addition, Holden says. In other words, you don't get any tax credits for doing it.