How and Why to Make a Prior-Year IRA Contribution Before the April Deadline

Did you know that you’re allowed to make IRA contributions for last year all the way up until this year’s tax filing deadline?

That’s right. You can make IRA contributions all the way until April 17, 2018 and mark them as 2017 contributions. You can even use the refund you receive from filing your tax return to make those contributions, which may be the best way to put that money to good use.

Whether you simply forgot to make your 2017 contributions or you only now have the money available, this post will explain why you’re still allowed to make those contributions, why it’s a good idea, and how to do it.

Quick Primer: What Is an IRA?

Before getting into the logistics, let’s take a step back and remind ourselves what exactly an IRA is.

An IRA is a tax-advantaged retirement account that you open on your own, outside of your employer. It comes in two flavors, each with its own special tax benefits:

Traditional IRA: Contributions to a traditional IRA are tax-deductible, meaning they reduce your taxable income for the year of the contribution. The money grows tax-free while inside the account and is then taxed when you withdraw it.
Roth IRA: Contributions to a Roth IRA are not tax-deductible, but the money grows tax-free and can be withdrawn tax-free in retirement.

Individuals are allowed to contribute up to $5,500 per year ($6,500 if you are 50+), though there are income limits that can restrict your ability to make contributions or deduct them from your taxable income.

And while there is a deadline for making those contributions, the IRS gives you all the way until the next year’s tax filing deadline to make contributions for the prior year. So this year you have until April 17 to make 2017 contributions, and those contributions can reduce your 2017 tax liability, even if you already filed your 2017 taxes.

This extended deadline can be helpful for a number of reasons:

You may not know whether you’re eligible to contribute until you’ve done your taxes and calculated your taxable income.
You may not have the money to contribute until after you’ve filed your taxes and received your refund.
You may have just plain forgotten to contribute, in which case the extended deadline acts as a sort of mulligan.

So, now that you know that you can still make IRA contributions for 2017, it’s worth asking whether you should. Let’s answer that question now.

Three Reasons to Make an IRA Contribution Before the Deadline

1. Reduce Your Taxes

There are a few ways in which making a 2017 IRA contribution now, before the deadline, could lower your taxes, even if you’ve already filed:

Traditional IRA contributions are tax-deductible if you’re under the income limits, so every dollar you contribute will reduce the tax you owe.
Since Traditional IRA contributions lower your taxable income, they can help you qualify for other tax breaks like the health insurance premium tax credit or the child and dependent care credit.
Both Traditional IRA and Roth IRA contributions could qualify you for the saver’s credit, which could put up to $2,000 back in your bank account if you’re married and filing jointly.

2. Extra Retirement Savings

The obvious benefit is that contributing to an IRA increases your retirement savings. And since your savings rate is the most important part of your investment plan, those extra contributions could be the best way to get yourself on track for your retirement goals.

3. Roth IRA: The Super Savings Account

Roth IRAs have a number of characteristics that make them a kind of super savings account, chief among them the fact that you can withdraw up to the amount you’ve contributed at any time, and for any reason, without being taxed or penalized.

Let’s say that you receive a $1,000 refund and you think you might need the money sometime in the near future and therefore don’t want to lock it up in a retirement account. You could contribute it to your Roth IRA now, before the deadline passes, and hope that you never need to touch it — letting it grow tax-free, but knowing that it’s available if you really do need it.

Roth IRAs can be used for a number of financial goals, from retirement, to college savings, to an emergency fund, to a house down payment. They’re incredibly flexible, which almost always makes contributing to them a good idea.

How to Contribute to an IRA Before the Tax Deadline

If you like the idea of contributing to your IRA before the tax deadline, there are two steps you’ll have to handle:

Making the contribution
Reporting the contribution on your taxes

The first step requires choosing an IRA provider, opening an IRA, and contributing money. I personally use Vanguard for my IRAs, and you can find reviews of other IRA providers here.

Anjali Jariwala CPA, CFP®, a fee-only financial planner and the founder of FIT Advisors, says that the main thing is to make sure you mark your contribution for the right year.

“It is important to confirm the contribution year with the custodian,” Jariwala says. “For example, if you’re making your 2017 Roth IRA contribution in 2018, ensure that the contribution is for 2017 and not 2018.”

The second step depends on whether you’ve already filed a tax return.

If you haven’t already filed a tax return, Jariwala says that you simply need to make sure that you report the correct contribution amount if you’re contributing to a traditional IRA so that your deduction is applied correctly.

If you have already filed a tax return, Jariwala says that the type of IRA contribution determines whether you’ll have to file an amended return.

“If you’re making a traditional IRA contribution and are eligible for a tax deduction, then you’ll want to file an amendment to take advantage of the deduction,” says Jariwala. “If you’re making a Roth IRA contribution, then no amendment is required, as Roth IRA contributions are not reported on the tax return.”

If you’re making a traditional IRA contribution and have to file an amended tax return, you can learn more about how that works here. Your accountant or tax preparer can certainly help you with this, as can your tax preparation software.

Should You Contribute to Your IRA Before the Deadline?

If you have the money available, and if it won’t negatively affect your other financial goals, then putting those funds into your retirement account before the 2017 IRA contribution deadline is a great idea. Saving more money is the single most powerful thing you can do to put yourself on track for a secure retirement, and you’ll never have another opportunity to use that 2017 contribution space – and to reap the tax advantages it can provide.

Even if you think you might need the money for something in the near future, you can always contribute it to a Roth IRA and keep it in a safe investment, like a money market account. That way you can take advantage of the contribution allowance, keep it accessible if needed, and avoid the risk of losing that money to a stock market crash.

And remember, the IRA contribution deadline for tax year 2017 is April 17, 2018. So if you’d like to contribute, you should act soon.

Matt Becker, CFP® is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families.

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