When Can You Make A Contribution To Your IRA

Why does April tax season put me in mind of September Song ?

Oh, the days dwindle down, to a precious few….

A precious few days to make your contribution to tax advantaged retirement accounts.

Or, do you tap your foot to a different song:  Do You Believe in Magic? 

Do you expect that finances in your old age will magically take care of themselves?

Content to continue to put off thinking about old age, til it’s “convenient”?

Just how committed are you to magic?

Saving is never easy, it’s just important.

What you need to know

For reasons known only to Congress, the law allows you to contribute only a limited amount to an IRA each year.  That money grows without taxes until you withdraw it.

If you let the deadline for a year’s contribution pass without adding to your account, that year’s permitted contribution is gone, for good.

You can make a current year’s contribution any time before next year’s tax return is filed, but you can’t pick up the allowance for last year.

IRA’s come in two flavors, if you will:  traditional and Roth.

Contributions to a traditional IRA may be deductible from your income taxes.  In return, the money is taxable when you withdraw it.

Roth IRA’s are funded with after-tax dollars, that is, the contribution isn’t deductible now.  But,  huge benefit ahead, the money and all it earns is tax free when it’s withdrawn.

Who is eligible

You or your spouse must have earned income for the year in order to contribute.  That’s the only rule the two plans have in common.

The IRS has the dry but comprehensive explanation of eligibility.

How much

The  contribution cap  is $6000 if you are under 50.  If you are over 50, you can set aside $7000.

If you can’t max out last year’s contribution, don’t let that keep you from contributing a lesser sum.  The longest journey begins with a single step.

And there is no good reason for waiting til tax time to make your contribution for this year’s IRA.  You get the maximum tax free growth by making your current year contribution as soon as you can.

In my bankruptcy practice, I love this time of year because clients who have more cash than we can protect otherwise can fund their IRA’s for last year and this year, before we file.

Why save

Nearly 10% of the elderly go hungry for some part of every month.

Out of pocket medical expenses for a couple from 65 forward are $240,000, in today’s dollars.

And 2% annual inflation is the government’s target. So everything will be more expensive at retirement than it is now.

Social Security was never intended to provide more than a safety net for seniors.  The employer-provided pension is nearly extinct.

Your choice is to provide for some part of your retirement or be dependent on others.  Personally, I want to have a choice about whether I live with my sons or not in old age.

Therefore, I save.

The power of IRA’s is that your money grows without paying taxes each year on the growth.  That increases the rate of growth.  You only pay income taxes upon withdrawal, if you’ve chosen the traditional IRA.  If your IRA is a Roth, there are no taxes at all.

From my world of debtor/creditor rights, IRA’s are priceless because they are largely beyond the reach of your creditors.

It is the safest place to save going.  Even a creditor who gets a judgment against you can’t seize your IRA.

What next

If you have an IRA, all you need to do is transfer your contribution to the account before you file your return.

If this is your first step into providing for your retirement, you can open an IRA at a bank, credit union, brokerage firm, or online.

You don’t want to be singing the blues come retirement.

Image courtesy of Koichi Hunter and Flickr