There's one week left to contribute to 2020 IRAs ahead of May 17 tax deadline
The extended tax-filing deadline gives many Americans extra time to contribute to certain investment accounts for 2020.
The IRS in March moved the due date for individual returns to May 17 from April 15 due to the coronavirus pandemic. It also confirmed in March that moving the filing deadline also pushed back the last day to contribute to individual retirement accounts and Roth IRAs for the 2020 tax year.
The last day for such contributions matches the filing deadline, meaning that investors have one more week to sock away money for retirement.
"This is a rarity in the tax world," said Ed Slott, CPA and founder of Ed Slott & Co. "It's very rare in the tax code that you get an opportunity so far after the year ends to actually change or better your position for the prior year."
People also have until May 17 to contribute to health savings accounts, Archer medical savings accounts and Coverdell education savings accounts in addition to IRAs.
The benefit of IRAs
Both traditional and Roth IRAs can be powerful retirement savings tools over time for those who want to put away money outside of a employer-sponsored 401(k) or aren't offered it at work.
The accounts offer significant savings potential. People under the age of 50 can contribute up to $6,000 in a traditional or Roth IRA account for 2020, and those 50 and older can put in up to $7,000 in the same year, depending on their income.
Many Americans are within the income threshold to contribute the full amount for 2020 in a Roth IRA. Single people or those who are married filing separately can contribute the full amount if their modified adjusted gross income is less than $124,000. If they make more, they can contribute less than the full amount until income hits $139,000, at which point they're ineligible.
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Married couples filing jointly who make less than $196,000 can contribute the full 2020 amount, and eligibility phases out at $206,000.
This year, some people may be able to use contributions to a traditional IRA to lower adjusted gross income and potentially qualify for the latest round of stimulus checks — generally, contributions to a traditional IRA are deductible, depending on income and if you also have an employer-sponsored retirement plan. Roth IRA contributions are not tax-deductible.
Doubling up savings
Having extra time to contribute to a previous year gives people the opportunity to double up savings, if they're able. Through May 17, one could potentially save the full $6,000 for 2020 and be simultaneously saving towards 2021 at the same time.
Of course, not everyone will be able to save that kind of money this year, said Slott. The coronavirus pandemic left millions of Americans unemployed, and many are still struggling to get back to work.
But others have been relatively unscathed by the pandemic and are in a position to contribute extra to their long-term savings. In addition, some people may also be getting back to work a year into the pandemic and looking to pad savings or build them back up and could take advantage of the longer tax season.
"It's good to know and not forget that May 17 date," said Slott. Even if you file an extension for your tax return, you must contribute to IRAs by May 17 to put that money towards last year's maximum, he said.
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