Estimated reading time: 2 minutes, 51 seconds
We’re about a month away from Tax Day 2019 (April 15). While many have already completed their tax returns, others will do so within the next month. Either way, it’s important to know how Tax Day could impact your Individual Retirement Account (IRA) savings.
So, with Tax Day 2019 right around the corner, how could it affect your IRA contributions for 2018 and 2019?
You have up to Tax Day 2019 to contribute to your 2018 limit, as these are called “prior year contributions.” But even though you have this extra time, it’s beneficial to get those contributions to your custodian several days prior to the deadline. This allows for processing times or any last-minute changes and helps ensure your deposit is processed on time. It also allows your custodian time to attend to any issues like unsigned checks, incomplete forms and so on.
If you decide to make prior year contributions, ensure you note whether the contribution is to be applied to Tax Year 2018 or Tax Year 2019. Custodians must assume they are to apply the contributions to the year in which they are received. Therefore, if you prefer the contribution to be for the previous calendar year, you must specify on the form.
Kingdom Trust clients should use the Deposit Instructions form, which allows for easy designation for the tax year contribution.
In addition, if you’re receiving a tax refund, did you know you could use all or part of the refund to contribute to your IRA?
You may even receive tax benefits if you use your refund for a retirement contribution. But whether you should is up to you and your team of professionals. If this is something you’re considering, here are some options to bring to the discussion:
- Make a contribution via IRS Form 8888: While you can’t contribute to a SIMPLE IRA this way, you can contribute to a Traditional, Roth or SEP IRA via Form 8888. You may also use Form 8888 for contributions into a Coverdell Education Savings Account (ESA) or Health Savings Account (HSA). However, you must deposit the refund into two or three accounts, such as one Roth IRA and one ESA. Also, the accounts to be funded in this fashion must already be established.
- Direct deposit into a retirement account: If you’d rather not spread the refund over two or three accounts, you can have your refund (or part of it) directly deposited into an account of your choice. Most individual taxpayers assume this is only for a personal checking or savings account. In fact, you can also deposit directly into an already-established Traditional, Roth or SEP IRA.
- Manual deposit into a retirement account: You may also consider having the refund sent to you and then fund an account via a deposit of all or part of the refund amount. This process would be no different than were you to withdraw money from another source to deposit into an IRA.
You have multiple options should you consider using your refund to contribute to an IRA. That said, regular contributions are one of the best ways to help maximize potential retirement benefits. While you’ll be able to make Tax Year 2019 contributions up until Tax Day 2020, start early if possible. The sooner you make contributions to an IRA, the sooner the account may benefit from any investment income or gains!
Consult with your tax professional to determine if prior year contributions and/or funding an IRA with your tax return is right for you.