Tax Day. For some that means pulling out the checkbook to settle up. But others might be angling their money toward individual retirement accounts.
That is partly because of human nature — April 15 is the deadline for paying taxes and for making IRA contributions for 2014. “People do tend to procrastinate, and there’s nothing like a hard deadline to get you motivated and to take some action,” says Ken Hevert, a senior vice president with Fidelity Investments.
But some people wait until now to make the contribution because they don’t feel confident they can afford it or that it will lower their tax bill, until they’ve prepared their tax returns, financial advisers say. “People do like to see where they stand,” Hevert says.
Making a last-minute contribution to an IRA can have major tax benefits. Some people making contributions to a Traditional IRA qualify for a deduction, which would lower this year’s tax bill. Savings would also grow tax-free until the money is withdrawn in retirement. People who cash in early, however, would have to pay early-withdrawal penalties as well as taxes.
Contributions are fully deductible for people who don’t have access to a workplace savings plan like a 401(k). But people who do qualify for a workplace plan see their deductions phased out if they earn above a certain amount. For 2014 returns, the tax break is eliminated for single people making more than $70,000 and for married couples making more than $116,000 if they are covered by a workplace plan. The limit goes up to $191,000 for married couples if only one spouse is covered by a workplace plan.
Taxpayers can generally contribute up to $5,500 a year into either a Traditional IRA or a Roth IRA, which is funded with after-tax dollars, though that limit is increased to $6,500 for people who are at least 50 years old. (Contributions to Roth IRAs are not tax deductible.)
To get more out of the account, workers can make IRA contributions for last year and for this year at the same time, says Dan Keady, director of financial planning for TIAA-CREF. By not waiting till the last minute to make their 2015 contributions, savers can give their money more time to grow tax free. “Over time, starting earlier can produce more compounding,” he says.
When thinking about savings, some people are much more excited about setting aside cash for an immediate goal than they are about preparing for retirement. Some 24 percent of people say saving for a vacation or for a household appliance was their top priority, according to a survey by TIAA-CREF. That’s three times the share who said they prioritized saving in an IRA.
Contributions need to be made or postmarked by April 15 to count for 2014. But anyone who misses the deadline can still make a contribution and have it count for 2015 instead.
Those who can’t make a lump-sum payment can set up for smaller contributions to be automatically withdrawn from their paychecks every week or every month, suggests Lena Haas, senior vice president of retirement for E*Trade. Think of it this way: The $5,500 annual contribution comes out to a little more than $100 a week. “It’s a lot more tangible number for people to think about,” she says.