There aren’t many actions taken in 2020 that will impact your 2019 tax returns. IRA contributions are an exception to that rule. There are three reasons to consider making that contribution now for 2019, and the third reason may surprise you.
IRA contributions require that you or your spouse have earned income for the year of the contribution. In 2019 you needed to be under 70.5, but for 2020 and beyond, the age requirement is removed. For a tax-deductible IRA, you still must qualify based on age and income. The rules are strict regarding excess income and even more so if you or your spouse have access to company retirement plans. Assuming you qualify, you can contribute $6,000 if you are under age 50 and $7,000 if you are over age 50.
Retirement plans from your employer typically require that money is withheld out of your paycheck in order to contribute. IRA contributions are not the same. You can have money in an existing non-IRA account and simply transfer the money to an IRA titled account.
The IRA contribution can be either tax deductible and thus grow tax-deferred or it can be a Roth contribution (again, there are rules and you do have to qualify) where the investment grows tax-free. Both contributions are legal up until April 15th of the year following the tax period.
The third reason to contribute to your IRA – either traditional which is tax-deferred meaning you pay the taxes later or the Roth IRA – is that the contribution is money you aren’t used to living on. The secret to retirement is not replacing a certain percentage of your income but rather providing all of the income necessary to maintain your standard of living.
Every dollar you use to save today serves two purposes: there will be more money for your future needs and the contribution is a dollar you aren’t used to living on today. That by definition reduces your standard of living today and thus requires fewer assets needed at retirement time. Happy retirements are truly based on replacing the way you lived before leaving the workforce and saving today helps with that issue.
Paying down debt also helps in the same way. A dollar you apply toward a debt like a mortgage or a student debt reduces the debt due in the future, saves the interest expense and the amount of money you are accustomed to using for eating out, travel or cable TV.
The opportunity to add to your retirement accounts is limited in both amounts and in time. If you have the financial resources, you want to make the contribution every year. The earlier you can make the contribution in the year the longer the money has to grow, but it will not change the tax treatment. You must declare if you want a tax-deferred IRA that will be taxed later or a Roth IRA where the money and the growth will never be taxed again.
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