This week normally would be the deadline to file your federal taxes, but because of the coronavirus pandemic, this year you have until July 15 to file and pay your federal income taxes.
There's an added bonus to this extension: You also have until that deadline to contribute to an IRA for the 2019 tax year. Making those prior-year contributions up until tax day is a perk that one-quarter of Americans didn't know was legal in the first place, according to a 2019 NerdWallet survey of over 2,000 U.S. adults.
IRAs, or individual retirement accounts, are a tax-advantaged way to save for the future in addition to or in lieu of a workplace retirement plan like a 401(k). Adding money to these accounts can be a smart (and legal) way to reduce your tax bill.
"Making IRA contributions is like going to the airport. The responsible thing to do is get there early with plenty of time to spare," explains Matt Rosenberg, a certified public accountant and member of the American Institute of CPAs Financial Literacy Commission. Looking at it that way, he says, the extended deadline until mid-July is "like showing up late for your flight and finding it delayed. It's an unexpected break that should definitely be taken advantage of."
Here's what you need to know about this change.
For the 2019 tax year, you can contribute up to $6,000 to an IRA, or $7,000 if you're over the age of 50. (Those limits are unchanged for 2020.) That may seem like a lot. The good news is there's no minimum amount required for most of these accounts and so now you have three extra months to save a bit of money to contribute.
"Contributing to retirement savings is very important even if you aren't able to max out the annual contribution," Rosenberg says. "Retirement savings grow tax-advantaged in addition to having compound returns. As a result, over a long period of time even a small sum of money can turn into a very significant amount."
Three are two types of IRAs — Roth and traditional — with the key difference being when you are taxed on that money. With a traditional IRA, you may be able to deduct your contributions from your taxes now, and you'll pay taxes on withdrawals in retirement. With a Roth IRA, you make contributions with after-tax dollars, and that account will grow tax-free and be withdrawn tax-free in retirement.
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Around 36% of U.S. households had an IRA as of mid-2019, according to the Investment Company Institute. An IRA is a great way to build wealth and, once you've opened the account, you can select investments that make sense for your risk tolerance and age.
The government extended the tax filing deadline in an effort to help people who are struggling financially as a result of the coronavirus pandemic. Morgan Hill, CEO and owner of Hill & Hill Financial, says he's been "thrilled" with a number of the government's steps, like this one, to help American workers.
When it comes to an IRA, that extra time can be helpful if you were planning to contribute to one of these accounts in the first place. Hill recommends prioritizing contributions for 2019 over 2020. "Do everything you can to get your 2019 deductions," he says.
If the extra time allows you to find some additional savings you can contribute to your IRA, all the better. Still, it's important not to lose sight of near-term needs, especially given the uncertainties now about the economy more broadly and your financial situation specifically. If you don't have an emergency fund already, you may want to prioritize that instead.
Don't invest money you'll need to pay for living expenses because accessing money prematurely from an IRA can be difficult and involve penalties, Rosenberg advises.
Still, to the extent it's feasible, Hill recommends that you stay on track with your retirement contributions.
"I encourage people to continue to make contributions to their 401(k) and IRA," Hill says. "Maybe scale it back if you have to, but don't stop. Continue on, and don't radically change your savings and retirement planning."
Many people are tempted to save up until they have a set amount before making IRA contributions, or what's known as lump-sum investing. A different strategy known as dollar-cost averaging is to make regular contributions at set intervals.
With about three months until the IRA contribution deadline, you're on a bit of a limited schedule. And rather than debating which strategy is preferable, the key is to commit to funding an IRA, with whatever money you can, and then stick with that plan.
"Making contributions to an IRA as soon as possible each year will give an investor a higher probability of accumulating future wealth," Rosenberg says, adding that it's important to invest money intended for retirement as soon as possible.
Even so, don't get too hung up on when you make those contributions because over the scope of decades, the timing matters less than actually contributing, Hill says. "The discipline of saving and contributing is what's key."
And Rosenberg adds: "Don't try to time short-term market movements when making IRA contributions. Gambling on the next few weeks or months isn't consistent with retirement saving, which is a much longer-term financial goal."
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