You can still reduce your tax bill this year: How to make 2021 contributions to your IRA in 2022

While 2021 is in the past and the 2022 tax season is now upon us, you still have the opportunity to make contributions to your IRA accounts for the year prior.

By doing this, you can make progress towards your retirement goals and reduce your taxable income on your 2021 tax return. However, the deadline to take advantage of this is April 15, 2022, even though taxes this year are due by April 18.

Select details how you can make contributions for 2021 in time for your tax filing this year, and what the tax-advantages are of both a traditional IRA and Roth IRA.

The contribution limit for both traditional and Roth IRA accounts is $6,000 for 2021 and 2022 (or $7,000 if you're at least 50 years old). However, both account types offer the ability to deposit money towards the prior year's contribution limit, giving Americans more opportunity to fill their retirement accounts if they couldn't make a contribution in time. So if you're behind on last year's contributions, you have roughly two months to fill your IRAs' as much as possible to earn tax breaks.

Here's how you can do it:

Open up your brokerage platform and find where you can contribute to your IRA. You'll be able to select whether you want to contribute for 2021 or 2022. In this case, you'll want to choose 2021 since you'll have until April 2023 to contribute for the 2022 tax year.

This is what my Roth IRA account through Vanguard looks like when I try to purchase an index fund within my account. In this case, my 2021 box is gray because I have made the maximum contributions to that account for 2021. Note that each brokerage's platform will look different.

You can open both an IRA and Roth IRA with brokerages like Fidelity and Schwab, as well as robo-advisors like Wealthfront and Betterment.

A traditional IRA and Roth IRA both have tax-advantages to help you reduce your taxable income. Here's what you need to know about each:

Traditional IRA: Contributions you make today are made pre-tax, meaning that you're deferring paying taxes on some of your income until you withdraw the money. Because you're depositing money pre-tax, you will earn a tax deduction today. However, when you decide to withdraw the money (ideally in retirement), you'll pay ordinary income tax. Be aware that while you can contribute to both a 401(k) and traditional IRA at the same time, you may not be able to take a tax deduction for contributions to IRA.

Roth IRA: Contributions you make today to a Roth IRA are post-tax, meaning that you've already paid taxes on the money you're depositing. However, once you've had the account for five years and one of the below life events happen, you can withdraw all of the funds (including any gains) tax-free:

• You reach at least 59 ½ years old
• Are permanently disabled
• Use the money (up to a $10,000-lifetime maximum) for a first-time home purchase.

And the best part of either a traditional or Roth IRA is the fact that your money can compound over time.

For example, if you deposit $6,000 per year in a traditional IRA account, you reduce your taxable income now, and at a moderate 7% average yearly return over 30 years you'll have just over $600,000 waiting in retirement. You'll have made $180,000 in contributions but realized $420,000 in gains. In a traditional IRA you'll pay taxes on that money when you retire, but with a Roth IRA you won't be taxed on any of those withdrawals.

So if you decide to contribute to a traditional IRA, be sure to claim your contributions when you file your taxes with a service like TurboTax or H&R Block. These tax programs can help you maximize deductions (including deductions regarding investments) and increase your refund.

The 2022 tax-filing deadline for most people is April 18, which is a mere two months away. However, be sure to deposit as much as you can to your IRA accounts before the April 15 deadline for 2021 contributions arrives. Because each dollar you contribute now means being $1 closer to living a comfortable retirement.

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