It's Not Too Late

It isn’t often that we get to fix our mistakes, but here’s some good news. If you regret not adding more money to your retirement accounts last year, you can take advantage of a do-over. You have until the date 2021 tax returns are due to contribute to an individual retirement account (IRA) and if you choose a traditional IRA you could qualify for a tax deduction on your 2021 return.

IRA Basics

An IRA is a tax-advantaged retirement account often used by individuals who are self-employed or who aren’t covered by an employer’s retirement plan. However, it can also be used to supplement retirement benefits received through an employer. To be eligible, you must have earned income that’s at least equal to the amount you contribute to the IRA.

Traditional or Roth?

With a traditional IRA, you may be able to contribute to the account with pretax dollars, reducing your taxable income by the amount of your contribution. Your savings accumulate tax deferred until you begin making withdrawals, generally at retirement. Then, you’ll pay taxes on withdrawals at your tax rate at that time. Withdrawals from a traditional IRA prior to age 59½ may result in a 10% early withdrawal penalty. Contributions to a Roth IRA are made with after-tax dollars. However, withdrawals of earnings are tax free once certain conditions are met.

Contribution Limits

For the 2021 and 2022 tax years, the contribution limit for an IRA is $6,000. Individuals age 50 or older can make an additional catch-up contribution of $1,000, for a total of $7,000.

If you or your spouse is covered by a retirement plan at work or your income exceeds certain levels, the tax deduction may be limited. The IRS sets income thresholds that gradually phase out the tax advantages for wealthier taxpayers.

There are no age limits for contributing to either a traditional or Roth IRA.

Finding the Funds

If you have stimulus money that you didn’t spend, or a purchase you can delay, consider using that money to open a new IRA or add to an existing account. Work with your financial professional who can provide guidance for your situation.