Now that we're officially in April, countless Americans will no doubt find themselves scrambling to dig up paperwork, gather receipts, and do whatever else it takes to get their taxes filed in time for the April 17 deadline.
But it's not just your tax return you'll want to take care of by that date. April 17 is your last opportunity to make a contribution to your 2017 IRA, and if you miss that chance, you could end up not only shorting your retirement savings, but paying the IRS a lot more money than necessary.
Why fund an IRA?
Traditional IRAs offer a number of benefits, perhaps the most compelling of which is that contributions are tax deductible. In other words, any amount you contribute to your traditional IRA that falls within the annual limit is excluded from taxes, and your associated savings are a function of your effective tax rate. (Keep in mind that Roth IRA contributions are not tax deductible.)
Currently, the annual contribution limits for IRAs are $5,500 for workers under 50, and $6,500 for those 50 and over. So let's say you decide to put $5,500 into your IRA, and your effective tax rate is 30%. That move alone will shave $1,650 off your tax bill, just like that.
Now, if you're thinking it's too late to do anything about your 2017 IRA, here's some good news: You actually have until the 2017 tax filing deadline to fund last year's account, which means that if you get moving now, you can still make a difference not just in your nest egg, but in your ultimate tax bill.
A smart investment in your future
Many workers are tempted to fund traditional IRAs to snag an immediate tax break. But that shouldn't be your only motivation to contribute to an IRA. By putting money in, year after year, you'll be doing your part to establish a nest egg that pays for the retirement lifestyle you want.
Imagine you're able to max out an IRA at the current annual limits between the ages of 35 and 65. If your investments give you an average yearly 7% return during that time (which is likely with a stock-heavy portfolio), you'll wind up with about $545,000. Now, imagine that instead of first maxing out that IRA at 35, you skip a year and wait until you're 36. Though you'll have missed out on just a $5,500 contribution, your ending balance will be $40,000 lower because you'll have missed additional compounding as well. And that's why it pays to consistently fund an IRA, aside from the immediate tax benefits
If you'd rather not forgo some major tax savings and a chance to boost your nest egg, you'll need to get moving on last year's IRA. Though you technically have until the April 17 deadline to get your account funded, don't think you can waltz into your bank or financial adviser's office that day and expect to make that contribution. It takes time for funds to clear and paperwork to get signed and filed, so do yourself a favor and focus on that IRA immediately. And, while you're at it, start working on your tax return if you haven't done so already. Because before you know it, time will indeed have run out.