As Tax Day gets closer—April 18, 2023—many taxpayers are looking for ways to put a dent in their tax bills. To benefit from most tax-favored moves for 2022, like making a charitable contribution or buying new technology for the office, you needed to have taken action by December 31, 2022. But there’s a significant exception to that rule: contributing to an IRA. The deadline to contribute to your 2022 IRA is April 18, 2023.
IRA
IRA stands for Individual Retirement Arrangement (yes, it’s really arrangement and not account). There are two kinds of IRAs: traditional IRA and Roth IRA.
- A traditional IRA allows you to make potentially tax-deductible contributions (more on that in a moment) to save for retirement. Any earnings, including interest and gains, aren’t taxed until you withdraw from the account once you retire.
- A Roth IRA is not tax-deductible and is funded with after-tax dollars. The pay-off is that future withdrawals are tax-free.
While many taxpayers have retirement opportunities through their workplace, not all taxpayers can or do. But all isn’t lost: You can set up your own plan and make contributions.
Age Restrictions
It used to be the case that you could only contribute to your traditional IRA before age 70½ or older. Thanks to the SECURE Act, there’s no age limit for contributing to a traditional IRA—that’s also the case for a Roth IRA.
(That said, some banks and brokerages may have minimum age limits to open an account.)
Contribution Limits
The maximum amount you can sock away in a traditional IRA for 2022 is the smaller of your taxable compensation (generally, your earned income from wages and the like) for the year or $6,000 for most taxpayers. If you’re age 50 or older, you can contribute up to the smaller of your taxable compensation for the year or $7,000.
There are some important caveats:
- These limits are the most that can be contributed during the year, full stop. Whether all or part of the contributions are non-tax-deductible does not matter.
- If you have more than one IRA, these limits apply to the total contributions to all your IRAs for the year.
- If you file a joint return and your taxable compensation is less than your spouse’s, different rules apply—check with your tax or financial advisor for more information.
As for a Roth? There’s no difference—the Roth IRA contribution limits are typically the same as those for a traditional IRA. However, the amount you can contribute may be less, depending on your income, filing status, and if you contribute to another IRA.
Tax Benefits
Why scramble to meet the Tax Day deadline? As noted earlier, it’s an excellent opportunity to save for the future. But importantly, for tax reasons, if you meet the criteria, you can also deduct the amount you contribute to a traditional IRA from your income, making it tax deductible.
And while a Roth may offer future tax benefits, a traditional IRA allows you an immediate tax break for 2022. This article is targeted to those folks—the last-minute taxpayers looking to reduce their taxable income. If you’re looking for a more detailed comparison of traditional versus Roth IRAs, I would encourage you to discuss the pros and cons with your financial and tax professionals.
How To Open An IRA
Opening a retirement account feels like it would be daunting—but it doesn’t have to be. You can open an IRA at a bank or other financial institution in person or online.
If you open an account in person, you’ll likely have an advisor walk you through the process. If you are opening an account online, click over to the platform of your choice, choose the kind of account you want to open, and then complete an application. For most accounts, this only takes a few minutes.
Don’t be intimidated by the contribution limits. While it would be great if you could fund your IRA with the maximum amounts, there’s no requirement that you do so. Some accounts have zero minimums—shop around a little if you’re on a budget. And pay attention to extras like maintenance fees and commissions. If you don’t see them spelled out, ask. If you’re a regular at your bank or credit union, ask about a fee or minimum waivers—some will make those available to existing customers.
In most cases, you can fund an IRA with a check or an electronic transfer from an existing bank account. If you’re planning on making an electronic transfer, check with your bank or broker for transfer windows—some banks can take a few days to verify first-time transfers, and you must have funded the account, not simply opened it, by the deadline to claim the deduction.
And while you can opt to pick and choose your investments, you don’t have to. Depending on where you open the account and subject to their particular limits, your advisor can help you choose the best options based on your age and your risk appetite. Some online options also allow for robo-advisors, which are platforms that typically use an interview-like format to decide how to invest your funds and monitor and rebalance your account as needed.
If you already have an existing retirement account, you can roll it over to a new account—leading to the clever name, a rollover or a conversion. If you do that, it’s best to transfer from one account to another. If you need help, ask since transfers can be tricky. Notably, a rollover is not considered a contribution (and should not be treated as a withdrawal) for tax purposes.
Deadline
Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your tax return, not including extensions. For most people, this means that contributions for 2022 must be made by April 18, 2023.
Speak Up
This is the crucial part. If you make a contribution in 2023 that’s intended to qualify for the 2022 deadline, you need to make sure it’s properly notated. If you’re opening an account in person, tell your banker or broker that’s your intention. If you’re opening an account online, the platform should ask you if the contribution should count for 2022 or 2023. It’s essential to check the right year so that your records match what gets sent to the IRS.
What About 2023?
I know a lot of folks are going to tell you how very, very important it is to make contributions every year. And yes, that’s the best-case scenario—consistent contributions are how you grow your account for retirement.
But don’t get suckered into this “all or nothing” mentality. You don’t have to contribute to your traditional IRA every tax year. And if 2022 was great—but 2023 isn’t looking so fantastic—it’s okay to hold off making a contribution in 2023 or skip it entirely (please don’t @ me on this).
If the reason that you’re not making regular contributions in 2023 isn’t a financial burden, but an administrative one, you can set things up to make your life easier. For example, you can set up automatic transfers from your bank account to your IRA regularly (I send a fixed amount from my checking account to my online brokerage account every month). If you don’t trust yourself to actually let the money go, it’s best never to see it in the first place—if your employer allows you to split checks, set up direct deposit so that a fixed amount transfers straight from your paycheck.
Final Thoughts
Retirement accounts can be scary for novices—and not-so-novices. But don’t let the rules, funds, and accounts intimidate you. Almost anyone can open an IRA. If you’re not sure, ask questions.