An Individual Retirement Account, better known as an IRA, is exactly what it says it is: a retirement account for individuals. Even if you participate in an employer-sponsored plan, you’ll likely be eligible to contribute to an IRA account. But did you know contributions to this account must be made by a specific deadline? It just so happens that the deadline to contribute to an IRA coincides with the IRS deadline for filing taxes, which means if you’re looking into opening an IRA, you’ll need to do so before April 15th, as a rule. For 2022, that date is April 18th. For more information on contributing to an IRA by the tax deadline, check out this article from the IRS. This deadline applies regardless of any tax return extension you file.
Types of IRAs:
The two most common types of IRA’s, the traditional and the ROTH-IRA, have key differences which make them a better fit based on your financial situation. Check out this Charles Schwab graphic showing the key differences. The third IRA account is for small businesses and self-employed individuals.
With a traditional IRA, your contributions can be written off on your taxes as long as you meet the requirements set by the IRS. These requirements are based on your income, your filing status, and whether or not your employer offers an IRA plan. If you can deduct your contributions, you won’t pay taxes on this money as it goes directly into the account, and the taxable income you claim will be reduced by the amount you contribute. Taxes are paid upon withdrawal of funds, or what’s often referred to as tax-deferred. A traditional IRA is the best way to grow your retirement by deferring taxes on the money – and get a break on your taxable income when contributed. With a traditional IRA account, required minimum distributions (RMD) withdrawals must be taken by a certain age, normally 70 1/2 years.
A Roth IRA is a little different. When you open and contribute to a Roth IRA, your money grows tax-free because contributions are funded with after-tax dollars. Because of this difference, Roth contributions are not tax-deductible like those to a traditional IRA. Once you are eligible to withdraw, usually after you’ve had the account for at least five years and are 59½ years of age, then you can take your money out without penalties or taxes. You have paid the bill upfront rather than defer taxes upon withdrawal as with a traditional IRA. Another Roth benefit is more flexibility in that you can withdraw your funds tax-free as you head into retirement.
However, a Roth IRA eligibility has income limits; therefore, it’s not for everyone. High-income earners and those with multiple streams of income frequently have limited contribution amounts or if you exceed the upper-income threshold rules prevent any contributions. However, the Roth option could be a great investment tool for younger workers, including recent college graduates or those employees who just landed their first full-time work position.
A SEP IRA stands for a Simplified Employee Pension IRA. This IRA is perfect for small businesses that wish to offer tax-deferred retirement accounts. The employer makes contributions to a SEP, not the individual, and is completely tax-deductible. Rules for SEP IRAs are very similar to a traditional IRA.
These are also great for the self-employed as they are easy to administer, even for those with a “side-hustle.” Since they are cost-effective for small businesses, many offer them as a retirement benefit. Ask your manager if your company offers a SEP IRA or would consider offering one.
Not only do you need to open an IRA account by the tax deadline of April 18th, 2022, but you’ll also need to make your contributions by that date. All contributions must be allocated to the proper tax year to ensure you do not exceed the IRS’s allowable limits. Make sure you verify the contribution year with your investment advisor or on your next account statement if you utilize a self-managed account. Since contributions are tax-deductible, you’ll need to make them before the IRS deadline to claim them for the previous year.
There’s likely an IRA suited to your financial resources, tax bracket, and age, depending on your situation. Take the time to do a little homework and give yourself a leg up on your retirement. Have more questions about which IRA best suits your planning needs and situation? Contact a Registered Investment Advisor (RIA) or Certified Financial Planner (CPF) for further guidance.
At Organized Instincts, our seasoned team of daily money managers can help you streamline your financial tasks and routines. We will help you take advantage of these perks and benefits like making your annual IRA contribution. Schedule a free consultation today and give yourself the freedom to joyfully and abundantly live life.