As the tax deadline races towards us, it's natural to feel like a chess player under pressure from the time clock. Not to worry. You’ve already made it this far and are doing more than just fine. So, these tips on last-minute IRA moves might help you set yourself up for the long game, in other words, your retirement years. Long-term investing has many positives, and one of them is using sound retirement account strategy to your advantage. Long-term money management should include maximizing available benefits from IRAs, and you still have a few more days to switch plans or pile on your contributions.
Maximizing IRA Contributions
Traditional IRAs (individual retirement accounts) and other kinds of IRAs (SIMPLE, SEP, SARSEP, for example) encourage people to save for retirement. Since the average span of a retirement has stretched to 30 years, maximizing these accounts is an essential part of good long-term financial planning.
While the tax implications around various types of IRAs are rather complex, the easy part to understand is the upcoming deadline—April 18. Any additional contributions or changes that would impact your 2022 tax returns will have to be made by that day.1
Of course, the point of putting more into a traditional IRA is simple: you’re postponing taxation of that money until you withdraw it later on. And, since your tax bracket would likely be lower during retirement than it is today, you would be taxed at a lower percentage then, too.
If it does make sense for you to make last-minute contributions, don't forget to specify that your contributions should be allocated to the 2022 tax year. Otherwise, your IRA provider might automatically apply the deposit to the current calendar year. Now, what about the contributions on those limits? Glad you asked.
IRA Contribution Limits for 2022
Turning 50 has its benefits when it comes to IRA contribution limits. For example, the limit for a single filer under 50 for the 2022 tax year is $6,000. Fifty or older? Your limit gets bumped up to $7,000. But these numbers are the maximum contributions. Everything from AGI (Adjusted Gross Income) to marital status and whether you file your taxes jointly or separately.2 The math gets a bit complicated, so consult with your professional team to figure out the correct limit and, just as important, understand how any contribution would impact your long-term retirement planning.
Switching to a Roth IRA
Do you already have a Roth IRA? For many investors, we hope the answer is yes.
If you do have one, don’t forget that you can contribute to a traditional IRA and a Roth IRA during the same tax year. The caveat is that the contribution limit is for the total of all accounts you have, including 401(k) accounts. Again, the amount you can deduct is not always the same as your contributions limit. There are many factors that your tax professional will help you work through.3
So, back to those without a Roth IRA. If you speak with your tax person or financial advisor to review your existing retirement accounts. If converting a Traditional IRA to a Roth IRA seems like a savvy move that fits with your long-term financial planning, great! But it would still be something you’d need to put on your to-do list for the 2023 tax year. That’s because the deadline for making a conversion from a traditional IRA, 401(k), or other retirement account into a Roth IRA is always December 31st and not mid-April of the following year.4 So, why would you be thinking about that already?
Traditional IRAs defer taxation until later on. Roth IRAs, however, allow you to sock away after-tax dollars but then withdraw them, along with any potential future gains, tax-free. A Roth IRA even remains tax-free if it is passed on to heirs in an estate, though inherited IRAs of any type can get complicated. One more thing: there are no RMDs (required minimum distributions) with Roth IRAs—more on RMDs later—so you’re in more control of when to get the funds back out.5
Don’t Go Overboard
Despite all this encouragement about last-minute contributions, the IRS puts limits on what can be done. There’s actually a 6% per year penalty on excess amounts, which would defeat the purpose of keeping as much of your money as possible. The good news is that you have until this year’s due date to withdraw any excess contributions you’ve already made, but the clock is ticking.6
As mentioned above, most IRAs (except for Roth IRAs), come with a catch. Once you hit a certain age, the IRS requires you to withdraw a “minimal” amount each year. This is called a Required Minimum Distribution (RMD). As of the beginning of this year, that age is 73. It used to be 72. In fact, if you turned 72 in 2022, your first RMD was due on April 1 and another RMD will be required by December 31 of this year. Sorry, we don’t make these rules!
Now, the amount of your RMD depends on a number of factors, including marital status and the balance of your retirement accounts. Whatever is due, it’s important to always make the withdrawal in a timely manner. If you fail to make the required distribution on time, you’ll face a 25% excise tax. Yes, I said twenty-five percent. Until this year, it was 50%. Still well worth setting an alarm for. Maybe two.7
Even though the RMD timing is not too relevant to making last-minute, it’s so important, we wanted to mention it now.
If you’re reading this and still have a few days to act on an idea or two you’ve just read, it’s time to call your financial advisor and accountant. There are many more options and details around retirement accounts they can help you with, too. Everything depends on your unique situation. For example, small business owners can consider setting up a SEP IRA (Simplified Employee Pension Plan). This is something that can be set up last minute and still apply to the 2022 tax year.
With the tax deadline looming, these last-minute IRA strategies can help you make the most of your retirement savings and should help keep you on track for a financially secure future. Your financial advisor and tax professional will provide you with the personalized advice needed to make any moves—for now or for next year.