Didn't max out your IRA this year? There's still time in 2022

Welcome back to another episode of Coffee & Cash and Happy St. Patrick’s Day weekend! In today’s video, we’re talking about 2021 versus 2022 IRA contributions now that the deadline is quickly approaching.

If you couldn’t max out your individual retirement account in 2021, don’t worry. There’s still time to make a contribution to traditional and Roth IRAs now in 2022 that will apply to your 2021 contributions.

The deadline for putting money into IRAs for this year is April 15, 2022, giving savers an additional month to contribute.

How do you make an IRA contribution for the year prior?

The contribution limit for both traditional and Roth IRA accounts is $6,000 for 2021 and 2022 (or $7,000 if you’re at least 50 years old). However, both account types offer the ability to deposit money towards the prior year’s contribution limit, giving you more opportunity to fill their retirement accounts if they couldn’t make a contribution in time. So if you’re behind on last year’s contributions, you have roughly one month to fill your IRAs’ as much as possible to earn tax breaks.

Here’s how you can do it: Some investment platforms allow you to contribute directly on their website, while others require a written check. Check with your advisor or platform to see their preferred method. No matter the method, make sure you specify which year you would like to contribute to.

We’ve covered how much you can contribute and when the contribution deadline is. So, which is better: a current or prior-year contribution?

There are two key factors to consider when deciding between a current and prior-year IRA contribution:

1.       How much you plan to contribute to your IRA in the year ahead.

2.       Your taxable income in 2021 and 2022.

Like we covered earlier, you're only allowed to contribute up to $6,000 to an IRA in 2021 and 2022, or $7,000 if you're 50 or older. If you've already hit that limit for 2021, you should stick to a 2022 contribution. Otherwise, you'll face penalties for overcontributions.

But if you haven't maxed out your IRA contributions for 2021, you might consider a prior-year contribution. Or you could even split your savings and apply some to each year.

Those contributing to a Roth IRA won't notice any difference to their taxes, no matter which year they apply the contribution to, because Roth IRA contributions don't give you a tax break this year. Traditional IRA contributions, on the other hand, give you an upfront tax break in exchange for you paying taxes on your withdrawals later.

If you're planning a traditional IRA contribution, think about when it will be of the greatest benefit for you. If you're at the lower end of your 2021 tax bracket, it might make sense to do a prior-year contribution. This will reduce your 2021 taxable income and may knock you down a tax bracket, meaning you'll lose a smaller percentage of your savings to the government. But if you think you'll earn more this year, you might want to save the tax break for your 2022 taxes.

It's up to you to decide which is best, but if you're planning a prior-year contribution, you should do this before filing your taxes. If you've already submitted your tax return and then decide to make a prior-year contribution, you'll have to file an amended tax return to avoid problems with the IRS. And no one wants to do their taxes twice.

Thanks for joining us for another episode. Don’t forget to like and subscribe and we’ll see you again next week.