IRA Contributions: It’s Not Too Late!
March 1, 2023
Tax season is just around the corner and there are some items to consider ticking off your financial checklist in March. One of those is contributing to an IRA. You may have questions such as what is an IRA? What options do I have when choosing an IRA? Why would I want to contribute to one before the tax deadline? We will answer those questions and explain why it’s still not too late to maximize your contribution in 2022.
What is an IRA?
An IRA is an Individual Retirement Account that helps you to save your money for retirement in a tax-advantaged way. [i] This type of account is set up by a financial institution of your choosing and allows you to save your money with either tax-free growth or on a tax-deferred basis.
What are my options?
There are multiple types of IRAs[ii] to choose from, but we will look at the types Emerald Advisors utilizes most: the Traditional IRA and the Roth IRA.
Traditional IRA
Adding a possible taxable deduction on your tax return makes this IRA appealing to many. By taking the deduction now, you take advantage of reducing your income while knowing you are saving for retirement. You will still pay taxes on this money it will come later during the withdrawal phase. This IRA is suitable for those who are in a higher tax bracket now versus what they will be in during retirement.
- Allows you to contribute pre-tax dollars that grow tax-deferred until you withdraw
- Withdraws are taxed at the owner’s income tax rate at the time of withdrawal
- There are annual contribution limits[iii] you must abide by
- If you make a nonqualified withdrawal before age 59 ½ years old, you pay income tax and a 10% withdrawal penalty
Roth IRA
Roth IRA contributions made are already taxed and cannot be deducted from your tax return. However, the bonus is when it comes time to withdraw from this account, taxes have been paid so the growth is tax-free
- Taxes on contributions are paid up front and future growth and withdrawals are tax-free
- Best for those who think they will be in a higher tax bracket in retirement or don’t know what the future tax bracket will be
- There are income limits[iv] for contributing to a Roth for both individuals and married couples, so be sure to check contribution limits annually
- There are certain rules pertaining to withdrawing Roth IRA funds, the biggest is that the account has to be opened for a minimum of five years; afterward rules apply on withdrawals. Contact Emerald Advisors if this is an area you would like to explore
Backdoor Roth
Emerald Advisors utilizes Backdoor Roth contributions for many clients who do not meet the criteria for contributing directly to a Roth IRA. This utilizes a traditional IRA where the yearly contribution is non-deductible due to income limits. After funding, the balance is converted to a Roth IRA. This allows for traditional IRA money you cannot deduct on your income taxes and allows it to be converted to a Roth and grow tax-free. Another benefit of the Roth IRA is that there are no Required Minimum Distributions (RMDs), whereas the traditional IRA will require these distributions once you reach a certain age.
- This is a strategy used by high-income earners for converting a traditional IRA to a Roth IRA
- It’s a legal way to work around the income limits that prevent high earners from contributing to Roth IRAs
- This is a way to avoid future taxes on your yearly contribution[v].
Why contribute to an IRA before the tax deadline?
Many of our clients rely on us to make contributions on their behalf year over year. Emerald Advisors utilizes the backdoor Roth for all of our clients who do not qualify to contribute directly. For others, it is not too late to maximize your contribution while also potentially reducing your taxable income if you select a Traditional IRA. Either way, simply maxing out your IRA contribution limits each year is a good financial discipline. You have until the tax filing deadline to contribute to a Traditional / Roth IRA, which is April 17th, 2023. Please do not wait till the last minute, though!
Invest in your future
“You can be young without money, but you can’t be old without it.” – Tennessee Williams
As your advisor, Emerald utilizes strategies that may be tax-advantaged or help you work towards your goals. Your future self and future retirement will only have thanks to offer if you consistently contribute to the IRA you have chosen. Remember that you have options, and we can help you choose what is best for your financial situation. So as we approach the 2023 filing deadline, if you want to be sure you have made the most of your IRA contributions, would like to open an IRA before the tax deadline, or make your 2023 contributions, we would love to talk with you and are here to support you and your financial goals.
Disclosure: Emerald Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
©Emerald Advisors, 2023
[i] (2023). Fidelity.com. What is an IRA? [Online] Available at: What is an IRA? | why you should invest | Fidelity
[ii] Coombes, A. & Yochim, D. (2023, January 6). Nerdwallet.com. 7 Types of IRAs: Find the One for You. [Online] Available at: 7 Types of IRAs: Find the One for You – NerdWallet
[iii] (2023). Irs.gov. Retirement Topics – IRA Contribution Limits. [Online] Available at: Retirement Topics – IRA Contribution Limits | Internal Revenue Service (irs.gov)
[iv] (2023). Irs.gov. Retirement Topics – IRA Contribution Limits. [Online] Available at: Retirement Topics – IRA Contribution Limits | Internal Revenue Service (irs.gov)
[v] Scott, M. (2022, November 7). Investopedia.com. Backdoor Roth IRA: Advantages and Tax Implications Explained. [Online] Available at: Backdoor Roth IRA: Advantages and Tax Implications Explained (investopedia.com)
