- Savers have until April 18 to make 2021 contributions to IRAs and health savings accounts.
- Contributions to tax-deferred account lower your taxable income for the year you made the contribution, but the IRS allows wiggle room for procrastinators.
Tax experts have been pretty uniform in their advice for filers this year: Once you have all the information you need, file promptly.
"The IRS has made it clear that they're massively backlogged," says Matt Sotir, a managing partner at Highland Financial Group, an affiliate of Equitable Advisors. "If you're owed a refund, the best chance you have at receiving it quickly is filing early and electronically."
But if you've procrastinated and have yet to file, you may still be able to trim your tax bill while funneling money toward your retirement. "There isn't a lot you can do for the previous year's taxes in the new year. But you can still contribute to tax-deferred accounts up until the tax deadline," says Lisa Greene Lewis, a certified public account and editor of the TurboTax blog. "You'll still be able to make an impact and decrease your taxable income."
Unlike Roth IRAs, which are funded with money you've already paid taxes on, traditional IRAs are funded with pre-tax dollars. That means you can typically deduct the amount that you contribute to these accounts in a particular year from that year's taxable income.
For tax year 2021, the maximum contribution to an IRA was $6,000, or $7,000 for savers age 50 and up.
If you didn't hit that number last year, there's still time to contribute and earn the tax break. You have until Tax Day — April 18, 2022 — to make a 2021 contribution. You'll just need to indicate to your financial institution that you intend for the contribution to count for 2021, rather than 2022.
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Making a prior-year contribution may be a wise move, depending on your financial situation. "People need to remember that their taxable income is going to determine a lot of things that aren't necessarily tax-driven," says Sotir. "If you have student debt and work for a nonprofit, you may be eligible for loan forgiveness. Your income can affect what you're going to pay. In general, minimizing your income could be a way to lower your student loan payments."
Tax rules around student loan forgiveness are complicated, Sotir notes, and it may make sense to enlist some help: "If you have any kind of outside-the-box tax situation, consulting with an advisor is worth your while."
Your contributions to an IRA earn you an upfront tax break but come with a bit of a catch: You'll owe tax on any money you withdraw, and funds you take out before age 59½ comes with a 10% penalty on top of the tax.
Like an IRA, contributions to a health savings account (HSA) earn you an upfront tax break, but there are fewer strings attached when it comes time to take the money out. "An HSA has triple tax savings," says Tess Zigo, a certified financial planner at LPL Financial in Palm Harbor, Florida. "It's pre-tax on the way in, your money grows tax-free, and it's tax-free on the way out, as long as you use the money on qualified medical expenses."
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That makes these accounts, which are available to employees covered by high-deductible health plans, an attractive vehicle for those saving for long-term goals such as retirement. And unlike flexible spending accounts, which often come with "use it or lose it" provisions, money in your HSA that you don't use for medical expenses this year roll over.
For 2021, the maximum contribution to an HSA was $3,600 for individuals and $7,200 for families, with an additional $1,000 "catch-up" contribution available for those age 55 or older.
Regardless of the type of account you contribute to, trimming your tax bill while saving in a tax-efficient way toward retirement is rarely a bad idea, says Zigo. Many young investors, who instead might trade in taxable brokerage accounts "may be focusing on instant rewards and instant gratification," Zigo told Grow. "And if you're starting out, you need to be focusing on the long term."
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