(Charlene Rhinehart, CPA)
If you dropped the ball on your retirement goals last year, you still have time to make up for it. The IRS will allow you to contribute to an individual retirement account (IRA) up until the tax filing deadline, and that includes the Roth IRA.
Before you make a move, however, make sure you are qualified to make direct contributions to this type of account. You’ll have to pay a penalty for excess contributions if you contribute too much money.
Here’s what you need to know if you want to stash some cash away in a Roth IRA before the deadline. Most filers will have until April 18 to get their last-minute contributions in the account.
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How a Roth IRA works
Before you dump all your money into a Roth IRA, it’s important that you understand the rules. Roth IRAs allow you to invest after-tax dollars and watch the money grow tax-deferred. The cherry on top is being able to withdraw gains and dividends tax-free after reaching age 59 1/2 and signing off on the five-year rule.
Let’s say you build up a million-dollar Roth IRA portfolio. The IRS won’t require a piece of the pie if you follow all the rules. You’ll be able to enjoy every penny of your $1 million jackpot, tax-free.
If you’re worried about your money being locked up forever, you shouldn’t be. The Roth IRA offers a bit more flexibility than other retirement accounts since you’ve paid your tax bill up front. You’re allowed to withdraw 100% of your contributions anytime you want without incurring taxes or penalties. Make sure you don’t touch earnings or you’ll sound off the IRS alarm.
Review the 2021 contribution limits
If you want to maximize your Roth IRA potential, you need to contribute as much as you can for each year you are eligible to do so. For 2021, you can contribute up to $6,000 in your account if you are under 50 and had earned income. The contribution limits are sweeter if you are 50 or over: You can tuck away up to $7,000 in your account for 2021.
Your modified adjusted gross income (MAGI) will determine the fate of your contributions. You can contribute the maximum amount to a Roth IRA if you’re single with income under $125,000. That number goes up to $198,000 if you’re married filing jointly.
Your contribution power drops after your income exceeds that amount. You’ll be able to make reduced contributions if your income lands in the phaseout range. Once your income shoots past that upper limit, you won’t be able to make direct contributions to the Roth IRA.
Here are the Roth IRA income phaseout ranges for 2021 and 2022.
|
Filing Status |
2022 Income Range |
2021 Income Range |
|---|---|---|
|
Single or head of household |
$129,000 to $144,000 |
$125,000 to $140,000 |
|
Married filing jointly |
$204,000 to $214,000 |
$198,000 to $208,000 |
Data source: IRS. Chart by author.
Tackle 2021 and 2022
If you’re feeling ambitious, it’s not a bad idea to work on 2022 contributions after you have 2021 squared away. The contribution limits are the same, but the income thresholds are a bit broader. You can contribute to a Roth IRA for 2022 if your income is under $129,000 if you’re single and $204,000 if you’re married filing jointly.
By planning ahead, you may be able to double up on contributions this year. If you’re under 50, you can put away a maximum of $12,000 if you contribute to both a 2021 and 2022 Roth IRA. You’ll have more funds to invest in assets that can supercharge your retirement savings.
Don’t let a good benefit pass you by
If you qualify to contribute to a 2021 Roth IRA, now is your chance to create an action plan and get funds into the account. The countdown to get your money in a 2021 Roth IRA is on, so you don’t want to push this off.
You should also assess your personal financial situation and see what makes sense for you. Make sure your short-term financial obligations are covered before you max out retirement accounts.
If you aren’t ready to dive into a Roth IRA in 2021, not a problem. You know the rules now, and can get started on your 2022 Roth IRA. You’ll have until the tax filing deadline in April 2023 to load up your 2022 Roth IRA, but don’t wait until the last minute if you can make moves now.
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