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Like many U.S. taxpayers, you may be finalizing your 2021 tax return before the April 18 tax-filing deadline.
Many people don’t realize it, but the deadline for making tax-deductible contributions to some qualified retirement plans actually stretches beyond the end of the calendar year. You may be eligible for a valuable tax deduction and be able to boost your retirement savings at the same time.
When is the traditional and Roth IRA contribution deadline? The last day you can contribute for the 2021 tax year is the same as the 2021 tax-filing deadline – April 18, 2022.
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IRA Contribution Deadline: You Can Still Make Contributions for the 2021 Tax Year
Because the IRA contribution deadline for the 2021 tax year is April 18, 2022, you have a great tax-advantaged opportunity in continuing to contribute to your traditional IRA. By doing so, you can possibly reduce your upcoming tax bill if you qualify to deduct these contributions.
The annual IRA contribution limit for 2021 is $6,000 if you’re under age 50, or $7,000 if you are 50 or older. (The 2022 limits will be the same.) If you haven’t yet contributed the maximum amounts for tax year 2021, you can still make a contribution any time before April 18 in order to reach the annual limit. You may even be able to open a brand-new traditional IRA if you don’t have one currently and possibly reap tax benefits for tax year 2021. (Note that this strategy doesn’t apply to Roth IRAs, which offer tax-free withdrawals under the right circumstances, but are not tax-deductible in the year the contributions are made.)
For example, suppose you’re 55 years old and have contributed $4,000 so far to your traditional IRA for tax year 2021. You could make an additional contribution of $3,000 before this April 18 and possibly deduct this amount on your 2021 tax return.
So how do you know if your traditional IRA contributions are tax deductible or not? It depends on whether your employer offers an employer-sponsored retirement plan, such as a 401k. If not, the entire amount of your IRA contribution could potentially be tax deductible.
If your employer does offer a retirement plan, the deductibility of your IRA contributions will depend on how much money you earn. See the IRS site for more on when your deduction would start to phase out or be eliminated.
Read More: Can I Contribute to a 401k and an IRA?
How Can I Max Out My 2021 IRA in 2022?
If you want to get the full tax advantages for the 2021 year, consider the following steps for maxing out your 2021 IRA contributions.
1. Determine how much more you need to save.
Your first step is to figure out how much more you need to contribute to your IRA before April 18. For instance, if you’ve contributed nothing and you want to reach the $6,000 contribution limit for the year, you’d need to invest $2,000 per month in February, March, and April.
2. Rework your budget.
You can use online personal finance tools to review your monthly spending and rework your budget to allow for the additional monthly expense.
Read More: How to Master a Household Budget
3. Automate your contributions.
Set up automatic transfers to your IRA account. This will help mitigate the emotional impact of releasing the cash from your paycheck. If you are able to max out your IRA account this year, you’ll go a long way toward building a healthy nest egg for your retirement.
401k Contribution Deadline
The same principle applies to 401k plans. If you haven’t yet maxed out your 401k contributions for 2019, you could allocate contributions made between now and April 18, 2022, for tax year 2021. In order to do so, instruct your payroll department to apply these contributions to 2021.
Because 401k contributions are made with pre-tax dollars, you can’t take a deduction when you file your income taxes, but you will ultimately have saved on taxes because your overall taxable income will be lower the more you contribute to your 401k.
What Are the IRA Contribution Limits for 2021 and 2022?
The contribution limits for IRA accounts are as follows.
2021 Contribution Limit
2022 Contribution Limit
Traditional & Roth IRA
$6,000
$7,000 if 50+
$6,000
$7,000 if 50+
If you have maxed out your IRA contributions for 2021, congratulations! You’re taking maximum advantage of one of the best tools available not only to save for retirement, but also to possibly lower your current tax bill.
The 2021 tax-filing deadline is approaching quickly so you’ll need to act fast in order to implement these strategies. Be sure to speak with a tax professional for detailed guidance in your specific situation.
Get more actionable tips from financial advisors with our free guide, 5 Tax Hacks for Investors.
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