Savers and investors have a unique opportunity this year to put more money into their Individual Retirement Accounts, assuming they have not already maximized contributions limits. The question is, should they?

Traditional IRAs offer many benefits, and chief among them are annual tax deductions. They are not, however, without downsides. To better understand how increasing IRA contributions would impact a person’s goals and circumstances requires knowing some basic facts. For instance, annual IRA contributions are capped at $6,000 for those under age 50, and $7,000 for those 50 or older. The yearly contribution deadline tracks with the federal income tax deadline, which is typically April 15. Due to COVID-19, the Internal Revenue Service delayed 2019 tax filings until Wednesday, July 15. Even if you have already filed your taxes, you still have until mid-July to maximize your IRA contributions.

As mentioned, a primary benefit of a conventional IRA is the ability to lower your annual tax liability by deducting the total contribution amount from your total taxable earnings in a given tax year. If you are expecting a big tax bill for 2019, why not chip away by maxing out your IRA contribution limit? 

Increasing contributions also allows for greater potential long-term growth thanks to the tax-deferred nature of qualified retirement accounts. In other words, the more money you put into an IRA, and the earlier you do it, the bigger the compounding “snowball” effect. 

Keep in mind that tax-advantaged retirement accounts, like IRAs, come with certain bankruptcy protections, virtually anyone can contribute to them, and there is no limit to how many retirement accounts one can have. 

If tax avoidance is the goal, however, then closely consider whether it is in your interest to reduce short-term income taxes by deducting annual IRA contributions or pay a much larger tax bill down the road when you withdraw your tax-deferred IRA funds. There is no way around paying taxes and you will need to decide whether to pay them now or later. 

The IRS also imposes a hefty early withdrawal penalty for liquidating IRA account funds prior to age 59.5. The agency further mandates annual “required minimum distributions” after age 72. These drawbacks are among the various disadvantages associated with contributing to a traditional IRA before mid-July, but a prevailing factor should be whether you can afford to send money to an IRA. Do you have more pressing needs? Would paying down high-interest debt serve a better purpose? Would another investment vehicle provide greater results? Or is a traditional IRA exactly what you need? 

These types of investment questions can have a significant impact on your financial well-being and your financial future. If you or someone you know would like more information or guidance concerning a related legal matter, contact our office today.