Beat the Buzzer on Taxes and IRA Contributions

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By Schoonmaker - March 5, 2019

The end of March means the clock is ticking and it's time to check your bracket—your tax bracket. Why the rush? The tax filing deadline, April 15 this year, is quickly approaching and, with it, the cutoff for 2018 IRA contributions.

If you haven't filed your taxes yet, you're not alone. I hear that from some of our clients, too. But, the countdown is on to get your taxes in order. Don't miss your shot at contributing to an IRA for the 2018 tax year and potentially adding to your savings for the future.

No Overtime for IRA Contributions

Unlike extensions for tax filings, the IRA does not allow extra time for IRA contributions. Once the deadline has passed, you've missed the opportunity for that tax year.

Currently, you can invest up to $5,500 into an IRA. You could invest that same amount into a taxable account, but it would not have the same tax benefits an IRA offers. In fact, because investors may have missed out on those advantages in the past, the IRA created “catch-up” contributions for those age 50 or older. This lets them contribute an additional $1,000 each year.

Roth vs. Traditional IRAs: A Head-to-Head Comparison

I suggest comparing the features of both IRA types to determine which one might be the best for your situation.

Roth IRAs
 
Traditional IRAs
  • You must have earned income below the annual limits.
  • You may be partially eligible if your income is within the annual phase-out range.
Income Requirements
  • You must have earned income.
  • Contributions are not tax deductible. They can be withdrawn tax-free and penalty-free at any time.1
  • Earnings are withdrawn tax-free provided the account is at least five years old and you are at least age 59½.
Taxability of Contributions
and Earnings
  • Some or all contributions may be tax deductible.2
  • Income tax on earnings deferred until you withdraw them.3
  • At age 59½, you can make penalty-free withdrawals.
  • You are not required to take money out at any age. Plus, you can contribute as long as you have earned income.
Distribution Considerations
  • At age 59½, you can make penalty-free withdrawals.
  • In the year you turn age 70½, you can no longer make contributions. Plus, you must take minimum distributions annually to avoid a 50% penalty on the amount you're required to withdraw.

Income Out of Bounds for a Roth IRA? Consider a Conversion

If your income exceeds the limits and excludes you from qualifying for a Roth IRA, you can still consider a Roth Conversion IRA. You can convert all or part of your Traditional IRA to a Roth IRA without being subject to the 10% early withdrawal penalty. You will owe taxes in the year you convert on any contributions and earnings not previously taxed.

Find Your Tax Forms and Fund Information

If your accounts generated a 2018 Form 1099, we mailed them to you in January. You can easily download copies of your forms by logging into your account. And, visit our Tax Center to find additional information, such as fund-specific exemptions, and help understanding cost basis.

Let Us Give You an Assist

If the rush toward the IRA deadline is causing you madness, turn to us for help with your questions.

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Michael Schoonmaker
Michael Schoonmaker

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      1 State and local taxes may apply.

      2 Some or all contributions may be tax deductible, depending on your modified adjusted gross income, tax-filing status and if you or your spouse participated in a workplace plan.

      3 IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.

      Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

      IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

      This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.