Make the Most of Your IRA/ROTH Contributions Before the April 18th Deadline
While the Dec. 31, 2022 deadline for 401(k) contributions has passed, you can still put money into either traditional or Roth individual retirement accounts (IRAs), up until the tax deadline of April 18, 2023 1. Here are some tips as you prepare:
- Know Your Limits. This advice applies to your budget as well as IRS restrictions. Contribution limits vary depending on your age and employment status so consult with your advisor or the IRS website to avoid paying penalties for going over your allowable limits.
- Specify it’s for 2022. Since it’s already 2023, it’s important to be specific with your IRA custodian that your contribution is intended for 2022 in order to avoid any confusion.
- What If You Miss It? If you miss getting that last contribution in by the deadline, use it as a great start to 2023 and allow more time for compound interest to work in your favor. If you have an employee-based plan find out if your business has an extension.
The ABCs of IRAs
IRAs and Roth IRAs are two of the most popular retirement investment vehicles for individuals. Both types of accounts offer tax-deferred growth and can potentially provide higher rate of return. It’s important to understand how each type of IRA works when it comes to things like contributions, tax deductibility, and withdrawals, since these features can affect your finances now and down the road.
Key Differences Between Traditional and Roth IRAs
The key difference between traditional IRAs and ROTH IRAs is when taxes apply. Up to certain limits, traditional IRAs allow individuals to make tax deductible contributions into their account(s). Traditional IRAs allow you to deduct contributions from your taxable income on that year’s tax return. The money then grows tax-free, but withdrawals in retirement are taxed as ordinary income. Distributions from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 73, you must begin taking required minimum distributions.
With Roth IRAs, individuals can make contributions with after-tax dollars, so long as they fall within certain limits. You do not get a deduction for contributions to a ROTH IRA on your taxes, but the money grows tax-free and distributions during retirement are not taxed as ordinary income because taxes have already been paid. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.
Eligibility Requirements & Contribution Limits
Another difference between traditional and Roth accounts is contribution limits and eligibility requirements. For individuals covered by a retirement plan at work, the deduction for a traditional IRA in 2022 is phased out for incomes between $109,000 and $129,000 for married couples filing jointly, and between $68,000 and $78,000 for single filers. Like a traditional IRA, contributions to a Roth IRA are limited based on income. For 2022, contributions to a Roth IRA are phased out between $204,000 and $214,000 for married couples filing jointly and between $129,000 and $144,000 for single filers.
For the 2022 tax year, the contribution limit for both traditional and Roth IRA’s is either $6,000 or 100% of your earned income (whichever is less). This means you can contribute up to $6,000 to a traditional IRA or Roth IRA if you’re under 50—or up to $7,000 if you’re 50 or older. You can contribute to multiple IRAs in the same year (for example, a Roth and a traditional IRA). But your combined contributions can’t exceed the annual maximum. Your IRA contributions also can’t exceed your earned income for the year.
Contribution Deadlines
The last day to make 2022 contributions to certain retirement accounts is fast approaching. The contribution deadline is the same as your tax return filing deadline. This means you can make contributions to an IRA or ROTH IRA until April 18, 2023 for the 2022 tax year.
If you do have money to transfer, keep in mind the process can take time. We suggest initiating the transfer as soon as possible. Additionally, if you have questions about if you should make a contribution to an IRA account or which IRA account to make a contribution to, provided you have both a Traditional IRA and ROTH IRA, please reach out to your financial advisor so they can provide you with guidance that takes into account your current income and long-term financial goals to ensure you take advantage of all tax deductions and continue saving as much as possible every year for retirement.
It’s important to understand the differences between IRAs and Roth IRA’s when creating a retirement savings plan so you can choose the best option for your financial situation. Again, we’re here to help, so please don’t hesitate to reach out before the 18th (ideally as soon as possible) so we can help you think through how to maximize your retirement savings given your current income, age, and retirement plans.
Spring Cleaning for Your Finances
When spring is in the air we tend to want to freshen up our homes and offices as well. Here’s a few things to start cleaning out and when it’s appropriate to send them to the shred bin.
Old Tax Records
After 7 Years
“The IRS can go back six years when it believes more than 25% of income was omitted from the tax return.1
— Bob Carlson, Forbes
Investment Records
Until Sold
Keep the purchase confirmations for stocks, bonds, and mutual funds until you sell them. That way you have a point of reference for your cost basis and holding period.2
Receipts
Less than a year
Unless you need them for a tax write-off, you can shred or toss receipts as soon as they match your statements. Replace old insurance policies as new ones arrive.2
Financial Literacy for Kids
Having an open dialog with your kids about money can set them up for success. Even if money talks do not come naturally for you there are some simple things you can do to start.1
- Talk about financial goals as a family & celebrate wins.
- Ask kids to do a price comparison on an item they want to buy.
- Use their allowance as a learning tool.
- Set up a kid-friendly savings account and creating saving habits.
Sources:
IRS.gov, 2022
1. https://www.forbes.com/sites/bobcarlson/2022/02/23/when-is-it-safe-to-recycle-old-tax-records-and-tax-returns/?sh=fdcb011cf067
2. https://www.consumerreports.org/money/taxes/how-long-to-keep-tax-documents-a5302825423/
3. https://www.npr.org/2021/07/27/1021262899/finance-money-tips-kids-families-conversations
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Gladstone Institutional Advisory, LLC, a registered investment advisor. TrueVision Financial Advisors and Gladstone Institutional Advisory are
