With January comes a new tax year for most people. But it's not too late to max out your retirement savings accounts for 2022, if you haven't already.
While the Dec. 31, 2022 deadline for 401(k) contributions has passed, you can still put money into either traditional or Roth individual retirement accounts (IRAs), up until the tax deadline of April 18, 2023.
Contributions can also be made to employee-based plans including simplified employee pension plan (SEP) IRAs and savings incentive match plan for employees (SIMPLE) IRAs. You have up until the due date of your business's income tax return for the year, including extensions. For most businesses that will be April 18, but it's a good idea to check with your employer.
One advantage to maximizing IRA contributions for the year is that these accounts allow your retirement savings to grow faster with compound interest. The earlier you contribute, the more time your money has to grow.
Traditional IRA contributions are also tax deductible, which lowers your taxable income for 2022. Tax deductions for IRAs do have some restrictions, however, including your income and whether you participate in a workplace retirement plan already.
You should also keep in mind that your total contributions for traditional and Roth IRA accounts are limited to $6,000 for 2022. Those 50 and older can contribute an additional $1,000 for a total of $7,000. If you go over, you'll owe a 6% tax each year on the excess amount in your account, per the Internal Revenue Service (IRS).
And if you have a Roth IRA, remember there are contribution limits based on how much money you make. For single filers, the amount you're allowed to contribute begins phasing out in $600 increments if you earn $129,000 or more, stopping completely if you earn $144,000 or more.
For joint filers, the range is $204,000 to $214,000. More information on contribution limits can be found on this IRS webpage.
SEP and SIMPLE IRAs have more generous 2022 contribution limits. SEP contributions can't exceed the lesser of either 25% of the employee's compensation, or $61,000. SIMPLE plans have 2022 contribution limits of $14,000.
Another tip: If you are making 2022 IRA contributions after Jan. 1, 2023, specify that it's for 2022 with your IRA custodian. This will avoid possible confusion or human error, says Marguerita Cheng, a certified financial planner in Potomac, Maryland.
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