The rules stipulate that you are able to contribute funds to your IRA for the previous year up to next year’s filing deadline. That means that if you didn’t contribute money to your IRA in 2018, you can still make 2018 IRA contributions up until April of 2019.
This deadline cushion may take you back to the time you begged a teacher for an extension on a paper, and this offer is even better! The IRS gives you a 4-month extension (a buffer your teacher would probably never go for) to beef up your IRAs.
But how does this work and when is it a good idea for you?
Just to refresh your memory, an IRA is a tax-advantaged retirement account owned, operated, and contributed to by you. IRAs are outside of traditional workplace retirement contribution accounts. While there are many types of IRAs the two main types are:
It is important to know that all IRA’s have contribution limits. For 2018, $5,500 per year can be contributed to an IRA per individual ($6,500 if over 50).
So why would an extended deadline be helpful for your IRA?
It isn’t every day that you can say the IRS did something that was helpful to you. Perhaps this exception to the rule was a way to get them voted best teacher of the year and I’d like to share with you how it could be quite helpful for you.
By using this extension, you may be able to reduce your tax liability for 2018 even if you already filed your taxes
You can do this simply by contributing more money to your IRAs. Since a Traditional IRA is tax-deductible, every dollar that you put in is able to be written off. This could put you in a tricky situation depending on the timing of your tax return. If you contribute for the 2018 year in March and you already filed for your tax return, you would have to fill out an amended tax return. If you have not, then you simply have to note this contribution on your tax files.
One of the primary benefits of a traditional IRA is that it lowers your taxable income. This fact can also make you eligible for other tax benefits like healthcare and childcare tax credit.
Contributions to both a Traditional and Roth IRA can make you eligible for saver’s credit through the IRS which could get you up to $2,000 if filing single and $4,000 if married and filing jointly. If you want more information on saver’s credit, check out the IRS page.
It is very possible that come March you realized that you forgot to make your contribution to your IRA in 2018. Luckily for you, it is still not too late! Even if you simply forgot to contribute, adding money into your account now is a great way to keep your retirement savings plan on track. The IRS will penalize you for being late on other things, but you scraped by with a get-out-of-jail-free card, use it!
Compound interest has a close relationship with time. The longer you allow an account to gain interest, the more profit you will be able to make. Compound interest may sound scary, but it really is just interest on top of interest. You may be surprised at how much your account can grow simply because of this savings phenomenon.
The Final Grade
Growing your retirement savings accounts is always a good thing. With compound interest on your side, contributing to your IRA before the April deadline may be a great way for you to boost your savings and keep your savings momentum going.
Note: To see an example of how compound interest works in practice, click here to view a PDF that showcases how 20 years of maxing out your IRA with a 7% investment return could look for an investor.
Want to learn more? Contact us today. With the April tax deadline creeping up, we’d love to help you organize your IRA contributions before it’s too late!
Remember, the last date to file your taxes is April 15, 2019. Stay ahead of the curve and make your contributions while you can!
Tony Velasquez is the Founder and Managing Director of Wisely Advised an Illinois Registered Investment Advisor. Wisely Advised provides comprehensive financial planning and investment advisory services to both individual and business clients. You can learn more about Tony and his firm here.
Tony Velasquez runs Wisely Advised, LLC a full-service Registered Investment Advisory Firm offering comprehensive financial planning and investment advisory services to individuals, families, and businesses.
Whether it's traveling, being at the beach, or at his family's ranch in Texas, Tony loves enjoying time with his family and friends.