Why are IRA's so popular this time of year?
In previous blogs, we’ve talked about the types and benefits of IRAs. Today we will focus on why there is extra chatter around IRAs from January to April of any particular year. Each financial situation is unique and the information provided here is general and generic. It is in your best interest to seek the help of a financial professional, someone you trust and are comfortable working with prior to making financial decisions.
An IRA is an Individual Retirement Account (IRA) that allows a single person to save money for retirement in a tax advantaged way. The account is set up at a financial institution allowing the individual to save for retirement with tax free growth or on a tax deferral basis. While there are several types the two most popular are:
- Traditional IRA – potential upfront tax break of up to $6,000 in 2020 and 2021, plus an extra $1,000 catch-up contribution if you're age 50 or older: Contributions may be deductible.
- Roth IRA - Contributions are not deductible — meaning there’s no upfront tax break — withdrawals in retirement are completely tax-free.
There are a few reasons there is a focus surrounding IRAs this time of the year:
- Contribution: You can make an IRA contribution for a given year anytime between January 1 and the tax-filing deadline of the following year (usually April 15). So you can make a 2020 IRA contribution between January 1, 2020, and April 15, 2021. What this means is that for those of us that don’t contribute systematically throughout the year from January to April 15 of any given year there is an opportunity to maximize your contribution for the previous year and still be able to contribute for the current year. The current year contribution can be done incrementally or in a lump sum. It’s a great opportunity to sock away bonuses or additional earnings made around year end (Christmas). For 2021, the IRS has moved the tax filing deadline from April 15 to May 17, allowing us some extra time for contributions.
- Tax Benefit: This goes hand in hand with your contribution. Depending on the type of IRA you are utilizing, your contributions may be tax deductible and as such you would want to maximize your deductibility and your tax savings prior to your tax filing deadline (usually April 15).
- Excess Contribution: A lesser known reason is if you exceed the 2020 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account.